E-COMMERCE and DEVELOPMENT REPORT 2004 Foreword

2 CHAPTER 1: ICT FOR ECONOMIC DEVELOPMENT: ISSUES FOR INTERNATIONAL DIALOGUE

Table 1.1 Internet users worldwide (thousands), 2000–2003

2003 2002 2001 2000 Thousands 675 678 626 579 495 886 387 532 % change 7.84 26.36 27.96 ..

Source: ITU (2004).

From the point of view of the relative positions of (74.8 per cent) of the recorded growth in the developed and developing countries, the situation number of Internet users in the world occurred in has continued to move towards a growing pres- the developing world, and that the rate of growth ence of developing countries on the Internet, of its Internet population (17.5 per cent) is eight although this remains largely concentrated in a and a half times higher than that of developed relatively small number of nations. Five countries countries. Thus, according to ITU estimates, at (China, Republic of Korea, India, Brazil and Mex- the end of 2003 developing countries accounted ico) account for 61.52 per cent of all Internet users for more than 36 per cent of all the Internet users in the developing world. At the end of 2003, in the world, and the share of developing coun- almost three out of four Internet users in develop- tries in the Internet population of the world grew ing countries lived in the developing countries of by nearly 50 per cent between 2000 and 2003 (see Asia, as did two thirds of all the new Internet chart 1.1). users in the world. Table 1.2 shows the distribution of Internet users between the developed and More detailed information is provided for a the developing countries and the recent evolution number of individual countries in table 1.3. The of the number of Internet users by region. countries listed there have been selected on the basis of either their demographic and economic Bearing in mind the fact that the data for 2003 are weight in their respective regions or of their still incomplete, it should be noted that much above-average performance.

Table 1.2 Internet users by region, 2000–2003 (thousands)

2003 %Growth 2002 %Growth 2001 % Growth 2000 Africa 12 123 21.38 9 988 63 6 119 34 4 559 Asia 243 406 15.25 211 202 40 150 535 38 109 257 Europe 188 997 7.24 176 232 23 143 584 30 110 824 Latin America and Caribbean 44 217 4.19 42 439 45 29 224 65 17 673 North America (2002) 175 110 0.00 175 110 12 156 823 14 136 971 Oceania 11 825 1.88 11 607 21 9 601 16 8 248 Developed countries 396 754 2.06 388 746 15 339 427 19 285 480 Developing countries 246 290 17.53 209 556 50 139 317 48 94 352 Others 32 634 15.41 28 277 65 17 142 123 7 700 Total 675 678 7.84 626 579 26.36 495 886 27.96 387 532

Source: ITU (2004) data and UNCTAD calculations.

E-COMMERCE AND DEVELOPMENT REPORT 2004 Foreword

Information and communications technologies have considerable potential to promote development and economic growth. They can foster innovation and improve productivity. They can reduce transaction costs and make available, in mere seconds, the rich store of global knowledge. In the hands of developing countries, and especially small- and medium-sized enterprises, the use of ICTs can bring impressive gains in employment, gender equality and standards of living.

In recent years, international trade in ICT-related goods and services has grown faster than total trade. Some developing countries are making good use of ICT-generated opportunities to broaden their customer bases and increase their participation in international supply chains. But if all countries are to benefit, and if ICTs are to make a real impact on a country's economic prospects, more needs to be done to build capacities and create an enabling environment, nationally and internationally.

That effort will have to address broad, global issues such as Internet governance and the protection of intellectual property, as well as narrower, specific tasks such as ensuring that SMEs have access to ICTs. It is also likely to involve profound transformations on the part of individual workers and companies, and across economies as well. To accomplish such change with a minimum of disruption, policies need to be conceived and applied through a participatory approach. Such policies should also be firmly rooted in our overall struggle to defeat poverty and achieve other social goals.

This fourth E-commerce and Development Report discusses the effects of ICTs on the economies of developing countries and their enterprises, the costs and benefits of investing in ICTs and how societies can achieve higher rates of return on those investments. Its data and analysis are meant to provide a solid underpinning for the global debate on how best to implement the Plan of Action agreed to at the first phase of the World Summit on the Information Society (Geneva, December 2003). As we continue our efforts to spread the benefits of ICTs more widely and equitably, I am pleased to commend this report to a wide global audience.

Kofi A. Annan Secretary-General of the United Nations Acknowledgments

The E-Commerce and Development Report 2004 was prepared under the overall direction of John Burley, Director of UNCTAD’s Division for Services Infrastructure for Development and Trade Efficiency (SITE). It was drafted by a team coordinated by Angel González Sanz and consisting of the following UNCTAD staff members: Dimo Calovski, Hannah Davies, Scarlett Fondeur Gil, Carlos Moreno, Marta Pérez Cusó, Susan Teltscher and Chiara Vitucci.

Pilar Borque Fernández and Marie Kamara provided administrative support.

Diego Oyarzun designed the cover and formatted the charts, the text was edited by Graham Grayston.

The UNCTAD team acknowledges the contribution of the following consultants, experts and researchers who provided inputs for various chapters: Alan Levin, Alf Neumann, Lucinda Ramos and Ian Walden.

The assistance and contributions provided by the following private and public sector entities are also gratefully acknowledged: the Ministry for Technologies, Communications and Transport of Tunisia, Fundación para el Desarrollo Sostenible en América Latina (FUNDES), the Arab Institute of Business Leadership (Tunisia) and Bedoui & Company Consulting (Tunisia).

The team also wishes to thank the following individuals for the information, comments and feedback they provided regarding various aspects of the Report: Luís Abugattas, Cécile Barayre, Mongi Hamdi, Rouben Indjikian, Keri Facer and Professor Angela McFarlane. CONTENTS v

Contents

Foreword ...... iii Acknowledgements ...... iv List of Boxes ...... ix List of Charts ...... ix List of Tables ...... x List of Abbreviations ...... xii Explanatory notes ...... xv Overview ...... xvii

1. Information and communication technologies for economic development: Issues for international dialogue...... 1

A. The reach of the Internet and the growth of e-commerce ...... 1 B. The dialogue about ICT-for-development: Some suggestions ...... 15 Annex I: ICT usage in enterprises in selected countries ...... 20 References ...... 23 Notes...... 24

2. E-business and SMEs...... 25

A. Introduction ...... 25 B. Using ICTs in enterprises ...... 26 C. Assessing e-business in developing countries ...... 31 D. The case of Latin America: E-business survey results...... 37 E. Conclusions ...... 52 Annex I: Questionnaire on ICT usage and electronic commerce in SMEs ...... 55 References ...... 59 Notes...... 60

E-COMMERCE AND DEVELOPMENT REPORT 2004 vi CONTENTS

3. The creative industries and digital and Internet technologies: The case of music ...... 61

A. Introduction ...... 61 B. The international music industry ...... 62 C. The business of music...... 67 D. The development of music technology...... 70 E. Internet, music and change...... 72 F. Technologies and applications...... 77 G. Music copyrights, piracy and derivations ...... 85 H. Conclusions ...... 89 References ...... 90 Notes...... 95

4. Online higher education: Issues for developing countries ...... 95

A. Introduction ...... 95 B. The higher education market ...... 97 C. Online higher education ...... 101 D. Conclusion: The Internet’s impact on, and implications for, higher education ..... 122 Annex I: Models of online higher education ...... 125 Annex II: Indicative list of open source course management systems ...... 128 References and bibliography...... 129 Notes...... 131

5. E-government: E-procurement and developing e-business capacity ...... 133

A. Introduction ...... 133 B. Overview of e-government...... 133 C. E-procurement ...... 138 D. Conclusion...... 150 Annex I: Main e-procurement vendors and products ...... 152 References ...... 153 Notes...... 154

E-COMMERCE AND DEVELOPMENT REPORT 2004 CONTENTS vii

6. Protecting privacy rights in an online world...... 155 A. Personal data in the information economy...... 155 B. Categories of personal data...... 158 C. Principles of good practice ...... 160 D. Regulatory approaches...... 161 E. Transborder transfers of data...... 164 F. Survey on data protection legislation ...... 167 Annex I: List of States that completed the questionnaire, and their laws on data protection...... 171 Annex II: Websites of data protection authorities and other relevant websites ...... 174 References and bibliography...... 176 Notes...... 177

7. Assessing competitiveness in the ICT sector: The case of Tunisia ...... 179 A. Introduction ...... 179 B. Overview of the ICT sector and its business environment ...... 180 C. Tunisia’s national e-strategy...... 187 D. Firm strategies and competition: Survey results ...... 191 E. Conclusions: Implications for firm strategies and national ICT policies ...... 204 Annex I: Competitiveness “à la une” ...... 209 Annex II: Company case studies...... 210 References ...... 213 Notes...... 215

E-COMMERCE AND DEVELOPMENT REPORT 2004 viii CONTENTS

List of Boxes

Box Page 1.1 Partnership on measuring ICT for development...... 14 2.1 E-business processes...... 26 2.2 Towards official statistics on e-business...... 32 2.3 Examples of ICT usage by Asian SMEs...... 33 2.4 FUNDES: E-business for SMEs in Latin America ...... 38 3.1 Recording music: Who earns what? ...... 69 3.2 Free and open source software for music ...... 79 4.1 Educational priorities and contexts ...... 98 4.2 The effects of the internationalization of education...... 101 4.3 Virtual University of Pakistan...... 102 4.4 Bolivia wants a national policy on virtual education ...... 107 4.5 Examples of projects for open academic and scientific journals...... 116 5.1 Singapore: Best practice for e-government services ...... 137 5.2 South Africa: Successful investment in e-government infrastructure...... 139 5.3 The e-GP portal: A guide for developing countries...... 142 5.4 A local, low-cost and open solution in South Africa...... 147 6.1 The need for laws protecting personal data...... 155 6.2 Article 12 of the Universal Declaration of Human Rights...... 157

List of Charts

Chart Page 1.1 Internet users in developed and developing countries, 2000 and 2003 ...... 3 1.2 Internet users per 10,000 people, 2003...... 5 1.3 Internet hosts, 2000-2004 ...... 5 1.4 Proportion of businesses with Internet access (%), Colombia, 2001 ...... 20 1.5 Proportion of businesses with a website (% of those with Internet access), Colombia, 2001...... 20 1.6 ICT usage by size of enterprises: Russian Federation 2002 ...... 21 1.7 ICT usage by enterprises (%): Russian Federation, 2001-2002...... 21 1.8 ICT usage by enterprises (%): Thailand, 2002-2003...... 22 2.1 Internet usage by size of enterprise, 2003 ...... 29 2.2 Internet usage by size of enterprises, EU 15...... 30 2.3 SMEs in Europe: Commercial activities using the Internet, 2001 ...... 30 2.4 ICT use by SMEs, by country ...... 40 2.5 Use of intranet and extranet by enterprise size ...... 40 2.6 Types of Internet connection by country ...... 41

E-COMMERCE AND DEVELOPMENT REPORT 2004 CONTENTS ix

Chart Page 2.7 Types of Internet connection by size ...... 41 2.8 SMEs' use of Internet by sector...... 42 2.9 SMEs' use of Internet by country...... 42 2.10 Website functionalities by sector...... 43 2.11 Online transactions by sector...... 43 2.12 Internet transactions by sector ...... 44 2.13 Online transactions by country...... 45 2.14 Online transactions by size...... 45 2.15 Online transactions by country...... 46 2.16 E-business processes by enterprise size ...... 46 2.17 E-business processes by sector ...... 47 2.18 Perceived importance of ICTs by country ...... 48 2.19 Perceived impact of ICTs by country ...... 48 2.20 Projected investment in ICTs by country ...... 49 2.21 Barriers to ICT use by sector...... 50 2.22 Barriers to ICT use by country ...... 50 2.23 Barriers to Internet use by sector...... 51 2.24 Barriers to Internet use by country ...... 51 2.25 Needs in respect of enhancing ICT and Internet use, by sector...... 52 2.26 Needs in respect of enhancing ICT and Internet use, by country...... 53 2.27 E-business development...... 63 3.1 Stock prices of the “majors”, 2000-2004...... 63 3.2 Market for recorded music (2002, in millions of dollars, by region)...... 63 3.3 Music industry structure and processes ...... 73 3.4 The layered structure of the Internet ...... 74 3.5 Music industry affected by the Internet...... 76 4.1 The e-learning continuum to online education ...... 96 4.2 World enrolments in higher education, 1980–2000 (number of students) ...... 98 4.3 Number of foreign students in higher education by hosting region and region of origin, 2001–2002 ...... 100 4.4 E-learning readiness and e-readiness...... 114 5.1 E-government prevalence of 190 UN member States in 2001 ...... 135 5.2 Steps to e-government and e-procurement – The Finnish model...... 141 7.1 Turnover of ICT companies (hardware and software)...... 180 7.2 Number of private ICT companies ...... 181 7.3 Employment in private ICT companies...... 181 7.4 Structure of ICT spending...... 182 7.5 Structure of revenues of the ICT sector in the domestic market ...... 182 7.6 Structure of turnover of software and IT service companies...... 183 7.7 Production costs of software per man-day ...... 184

E-COMMERCE AND DEVELOPMENT REPORT 2004 xCONTENTS

Chart Page 7.8 Tunisian software and IT service companies by origin of capital ...... 185 7.9 Public spending on higher education (millions of dollars) ...... 190 7.10 Public spending on higher education (in percentage of GDP) ...... 190 7.11 Number of students in ICT-related technical studies ...... 190 7.12 Individual usage: A challenge for the knowledge-based society ...... 191 7.13 Export markets of software and IT service companies...... 193 7.14 Structure of turnover of software and IT service companies per region by degree of export orientation...... 193 7.15 Present and future products and services of software and IT service companies ...... 196 7.16 Present and future target industries of software and IT service companies...... 198 7.17 Impact of FOSS on business performance of FOSS developing firms ...... 199 7.18 Private venture capital in software and IT service companies...... 199 7.19 BDS goals of software and IT service companies...... 200 7.20 Impact of business development support on domestic performance in companies using BDS...... 201 7.21 Impact of business development support on export performance in companies using BDS 201 7.22 Strategy implementation in software and IT service companies ...... 202 7.23 Strategic priorities for software and IT service companies over the next five years...... 203 7.24 Main challenges for software and IT service companies to develop new customer relationships...... 206 7.25 Priorities for the Government for the next five years according to ICT business leaders ... 206 7.26 Availability of communication technologies...... 207

List of Tables

Table Page 1.1 Internet users worldwide, 2000-2003 ...... 2 1.2 Internet users by region, 2000-2003 ...... 2 1.3 Internet users in selected countries...... 3 1.4 Internet users per 10,000 people by region, 2002-2003...... 5 1.5 Internet users per 10,000 people, selected countries, 2001-2003 ...... 6 1.6 Number of hosts advertised in the domain name system...... 8 1.7 Internet hosts by region...... 10 1.8 The World Wide Web, 2003-2004 ...... 10 1.9 B2C sales in the United States, 2000-2003 ...... 12 1.10 US shipments, sales, revenues and e-commerce, 2002 and 2001 ...... 13 1.11 ICT use in enterprises, 2002 or latest available year...... 20 2.1 Results from e-business surveys, Morocco, 1999 and 2002...... 36 2.2 Latin American SME survey sample ...... 39

E-COMMERCE AND DEVELOPMENT REPORT 2004 CONTENTS xi

Table Page 3.1 Annual sales of major recording industry companies...... 63 3.2 Music CD and music cassette sales volumes ...... 64 3.3 25 largest markets by CD sales volume in 2003...... 65 3.4 Theoretical cost breakdown of artists' and record company income: Four cases...... 68 3.5 How many sales for a hit record?...... 70 4.1 World enrolments in higher education, 1980-2000...... 99 4.2 Framework of e-learning interests in higher education: Main uses and stakeholders ...... 104 4.3 Economist Intelligence Unit e-learning readiness rankings, 2003...... 105 4.4 Comparative tuition fees for online MBA: Foreign versus national students...... 113 4.5 Learning management systems market...... 117 5.1 Factors stalling e-government...... 135 5.2 Best practice in e-procurement functions ...... 145 5.3 Implications of e-procurement ...... 147 7.1 Public Internet service providers in Tunisia...... 187 7.2 Telecommunication indicators ...... 188 7.3 Targets of business development support programmes...... 189 7.4 Distribution of turnover among software and IT service companies by degree of export orientation ...... 194 7.5 Future markets for software and IT service companies...... 195 7.6 Companies with outsourcing business by share in turnover...... 197 7.7 Most important business development support programmes of companies using BDS ...... 200 7.8 Growth strategies of software and IT service companies ...... 202 7.9 E-business trends in software and IT service companies ...... 204

E-COMMERCE AND DEVELOPMENT REPORT 2004 xii CONTENTS

List of abbreviations

A ADR alternative dispute resolution ADSL asymmetric digital subscriber line APEC Asia-Pacific Economic Cooperation ASEAN Association of South-East Asian Nations ASP applications service provider ATI Agence Tunisienne d'Internet

B BDS business development support BOT build-operate-transfer BPO business process outsourcing BSD Berkeley Software Distribution B2B business-to-business B2C business-to-consumer B2G business-to-government

C CAD computer-aided design CAM computer-aided manufacturing CARICOM Caribbean Community and Common Market CC Creative Commons CCK Centre de Calcul El-Khawarizmi ccTLD country code top level domain CD compact disc CD-ROM compact disc read-only memory CERT Centre des Etudes et Recherche en Télécommunication CFC Common Fund for Commodities CIMSP Centre informatique du Ministère de la Santé Publique CNC computer numerical control CNI Centre National de l'Informatique CNS SSII Chambre Nationale Syndicale des Sociétés de Services et d'Ingénierie Informatique CNSS Caisse Nationale de la Sécurité Sociale CRM customer relationship management

D DAI digital access index DNS Domain Name System DRM digital rights management DSL digital subscriber line DSS decision support systems DVD Digital Versatile/Video Disc

E ECLAC Economic Commission for Latin America and the Caribbean ECOWAS Economic Community of West African States EDI electronic data interchange EIUEconomist Intelligence Unit ERP enterprise resource planning ESCAP Economic and Social Commission for Asia and the Pacific

E-COMMERCE AND DEVELOPMENT REPORT 2004 CONTENTS xiii

EU European Union Eurostat Statistical Office of the European Communities

F FAMEX Fonds d'accès aux marchés d'exportation FAQ frequently asked questions FDI foreign direct investment FIPA Foreign Investment Promotion Agency FITI Fonds d'Incitation à l'Innovation dans les Technologies de l'Information FM frequency modulation FOPRODEX Fonds de Promotion et Développement d'Exportation FOPRODI Fonds de Promotion et Développement d'Industrie FOSS free and open source software FOSSFA Free and Open Source Software Foundation for Africa FSF Free Software Foundation FTP file transfer protocol FUNDES Fundación para el Desarrollo Sostenible en América Latina

G GATS General Agreement on Trade in Services GDP gross domestic product GIS geographical information systems GITR Global Information Technology Report GNI gross national income GNP gross national product GNU GNU is not UNIX GPL General Public License GPS global positioning system GUI graphical user interface

H HRD human resources development HTTP hypertext transfer protocol

I ICANN Internet Corporation for Assigned Names and Numbers ICC International Chamber of Commerce ICO International Coffee Organization ICTs information and communication technologies IDE integrated development environment IFPI International Federation of the Phonographic Industry IML information markup language INBMI Institut National de Bureautique et de Micro-informatique IP Internet protocol IPRs intellectual property rights IRESA Institut de la Recherche et de l'Enseignement Supérieur Agricole IRSIT Institut Régional des Sciences Informatiques et des Télécommunications ISDN integrated services digital network ISET'Com Institut Supérieur des Études et de Recherches des Télécommunications ISP Internet service provider IT information technology ITC International Trade Centre UNCTAD/WTO ITES information-technology-enabled services ITU International Telecommunication Union

E-COMMERCE AND DEVELOPMENT REPORT 2004 xiv CONTENTS

J JIT just-in-time (production) J2EE Java 2 Platform Enterprise Edition

K Kbps kilobits per second

L LAN local area network LMS Learning Management System

M M&A mergers and acquisitions Mbps megabits per second MC music cassette MDG Millennium Development Goals MIDI Musical Instrument Digital Interface MIT Massachusetts Institute of Technology MNEs multinational enterprises mp3 Moving Picture Expert Group - 1/2 Audio Layer 3 MUST Malaysia University of Science and Technology

N NGO non-governmental organization NRI networked readiness index

O OCW Open Course Ware ODR online dispute resolution OECD Organisation for Economic Co-operation and Development OKI Open Knowledge Initiative OSD Open Source Definition OSFS open-source and free software OSI Open Source Initiative

P PC personal computer PDA personal digital assistant p2p peer-to-peer

R R&D research and development RIAA Recording Industry Association of America RITI Régime d'Incitation à l'Innovation dans les Technologies de l'Information RNRT Réseau National de Recherche et de Technologie RNS Réseau National de Santé

S SBTC skill-biased technological change SCAA Specialty Coffee Association of America

E-COMMERCE AND DEVELOPMENT REPORT 2004 CONTENTS xv

SCM supply chain management SCORM Shareable Courseware Object Reference Model SIC standard international classification SME small and medium-sized enterprise SSL secure sockets layer (protocol) Sup'Com Ecole Supérieure des Communications

T 3G third-generation (wireless technology) TAI technology achievement index TCO total cost of ownership TLD Top Level Domain TNC transnational corporation

U UDRP Uniform Dispute Resolution Policy (of ICANN) UNCITRAL United Nations Commission on International Trade Law UNCTAD United Nations Conference on Trade and Development UNDP United Nations Development Programme UNECA United Nations Economic Commission for Africa UNESCO United Nations Educational, Scientific and Cultural Organization UNITAR Universiti Tun Adbul Razak USO universal service obligation

V VCR video cassette recorder VoIP voice-over Internet protocol VSAT Very Small Aperture Terminal

W Wi-Fi wireless fidelity WIPO World Intellectual Property Organization WMA Windows Media Audio WSIS World Summit on the Information Society WTO World Trade Organization

X XML extensible markup language

Explanatory Notes

The term dollars ($) refers to United States dollars unless otherwise stated. The term billion means 1,000 million. Two dots (..) indicate that the data are not available or are not separately reported. A hyphen (-) indicates that the amount is nil or negligible. Because of rounding, details and percentages do not necessarily add up to totals.

E-COMMERCE AND DEVELOPMENT REPORT 2004

Overview

1. INFORMATION AND COMMUNICATION TECHNOLOGIES FOR ECONOMIC DEVELOPMENT: ISSUES FOR INTERNATIONAL DIALOGUE

A. The reach of the Internet and the ICT-relevant skills and the use that people and growth of e-commerce companies make of them. This is reflected in a country's Infostate, which aggregates Infodensity At the end of 2003, nearly 676 million people (or (available stocks of ICT capital and labour, includ- 11.8 per cent of the total population of the world) ing networks and ICT skills) and Info-use (uptake had access to the Internet. This represents an and consumption flows of ICTs as well as their increase of 49.5 million people or 7.8 per cent intensity of use). The application of this approach compared with the figures at the end of 2002. has confirmed the huge gap that separates the Developing countries account for more than 36 most ICT-advanced countries, which have at- per cent of all the Internet users in the world and tained a Infostate valued at 200, from the lowest- their share in the Internet population of the world ranking group of mostly African and Asian coun- grew by nearly 50 per cent between 2000 and tries, with Infostates as low as 5. While the interna- 2003. However, Internet users in the developing tional digital divide seems to be closing, this is world are concentrated in a handful of countries: happening only at a slow rate and for the most China, the Republic of Korea, India, Brazil and part in middle-ranking to countries, while those in Mexico account for 61.52 per cent of them. the most difficult situation are not seeing much Almost 75 per cent of the growth in the number progress. While income levels and higher Infostates of Internet users in the world occurred in the show a positive correlation, notable exceptions developing world. In spite of rapid rates of exist: countries with similar levels of gross domes- improvement in the penetration ratios of develop- tic product (GDP) show very different Infostates, ing countries, these remain ten times lower than and vice versa. ICT policy choices seem therefore the average of the developed world. to make a noticeable difference.

The number of Internet hosts worldwide grew by E-commerce growth 35.8 per cent between January 2003 and January 2004, reaching a total of over 233 million, which The available data from the United States and the represents a doubling of the growth rate in 2002. European Union (EU) show that while the value In terms of number of websites, as of June 2004 of online transactions is increasing, it is not there were over 51,635,284 websites worldwide, increasing at the same speed as that at which busi- 26.13 per cent more than a year before. The nesses connect to the Internet. number of websites using the secure sockets layer In the United States, e-commerce between enter- protocol (SSL), which supports secure transac- prises (B2B), which in 2002 represented almost 93 tions, grew by 56.7 per cent between April 2003 per cent of all e-commerce, accounted for 16.28 and April 2004, reaching 300,000. per cent of all commercial transactions between enterprises. While overall transactions between A comprehensive approach to the measurement of enterprises (e-commerce and non e-commerce) fell the diffusion, uptake and effects of ICTs across the in 2002, e-commerce B2B grew at a annual rate of world has been undertaken by Orbicom, the Net- 6.1 per cent. As for business-to-consumer e-com- work of UNESCO Chairs in Communications. merce, sales in the first quarter of 2004 amounted Orbicom's model is based on a conceptual frame- to 1.9 per cent of total retail sales, a proportion work that incorporates not only considerations that is nearly twice as large as that recorded in concerning connectivity and e-readiness, but also 2001. The annual rate of growth of retail e-com-

xvii xviii OVERVIEW merce in the United States in the year to the end require the development of new Internet-specific of the first quarter of 2004 was 28.1 per cent, international institutions, especially from the while the growth of total retail in the same period viewpoint of economic competitiveness. In fact, was only 8.8 per cent. given the political will to tackle the issues, existing systems of international coordination, coopera- Internet sales in the EU totalled $86 billion in tion or rule-making could be sufficient to deal 2001. Electronic data interchange and other non- with many if not most of the governance prob- Internet sales represented were four times greater lems posed by the development of the Internet. than Internet sales, bringing the total e-commerce sales in the EU to about $430 billion in 2001. A crude device to categorize the public policy issues that need to be addressed and the responses Although some developing countries have started that could be explored in each case could be to dis- to collect ICT indicators through their official sta- tinguish between the management of the Internet tistical systems, the data are not always compara- as a global utility and the international governance ble across countries or with those of developed issues posed by the use which people make of that countries. This calls for collective action at the utility. international level to coordinate the methodological work and to work towards a global database of Concerning the group of issues that could fall into ICT indicators. The UNCTAD secretariat has the second category, international governance launched a new data collection exercise to compile instruments already exist or could easily be e-business statistics from developing countries and devised. The substantive character of the issue in make them available in its annual E-Commerce and question, rather than the fact that the Internet is Development Report. The results can be found in the medium through which the problematic activ- chapter 1. ity is conducted, should be the determining criterion as to what level of “governance” (from consensus-building and cooperation to rule-making) B. The dialogue about ICT-for- and what instruments should be applied. development: Some suggestions Concerning the other group of issues, such as the management of the Domain Name System and the The question of Internet governance operation of the root server system, many developing countries are not at ease with the limited The discussions throughout the World Summit on influence of Governments in the structures in the Information Society (WSIS) process made it which policies are developed and implemented. clear that a majority of developing countries feel Reaching a common definition of the interests of that the status quo in this matter does not serve the international community that must be served their interests well and needs to be changed. The by the system of Internet governance, and agree- establishment of some sort of intergovernmental ment about the way in which Governments mechanism has been proposed. Concerns have should be involved in it, probably constitutes the been expressed, for instance, about the dominance most important aspect of the work to be done. by a small group of countries over core Internet Although at this stage of the discussion it is too resources. Legal mechanisms based on the enforce- early to make concrete institutional proposals, ment of private contracts (to be carried out essen- some of the features that they should have can be tially by the national courts of one country) are distinguished. not necessarily the optimal way to settle international public policy issues. Some view the Internet First, for any reform proposal to be viable it must as a new kind international public utility in which provide strong evidence that it will ensure the they feel they are not playing the role that is legit- continued stability and quality of service of the imately theirs. Internet, prevent its fragmentation and maintain the “bottom-up” processes through which stand- Once the need to respond to questions such as ards and policies have been developed so far. those outlined above is understood, it is also necessary to admit that there are not many examples of Second, no one-size-fits-all solution is likely to concrete policy areas in which such responses emerge. Questions in which technological and

E-COMMERCE AND DEVELOPMENT REPORT 2004 OVERVIEW xix

policy issues are particularly intertwined are likely and usage can result in faster, more equitable eco- to be best treated within a network of interna- nomic growth. tional frameworks of cooperation and coordination. The available data show that international trade in ICT goods and services has grown in recent years Third, evolution is more likely to produce results at a faster rate than total international trade and than a voluntaristic top-down approach. The cur- that it remains robust. However, in order to extend rent system is the result of a process that has taken the reach of the positive effects of ICTs on the eco- place over a remarkably short time and has has nomic growth of the majority of developing coun- not yet reached a stage of maturity that is accepta- tries an enabling environment for ICTs needs to be ble to all its stakeholders. created at the national and international levels. Pro- motion and facilitation of the adoption of ICTs by Developing countries need to assess the implica- enterprises, and particularly by SMEs, should also tions of different Internet governance models, play a major role in this regard. including in terms of their impact on the capacity of their economies to benefit from the adoption of In order to go further in its treatment of the e-commerce and e-business practices. A sustained economic aspects of the information society, the capacity-building effort for Internet policy-mak- second phase of the WSIS could explore answers ing is also needed so that the majority of the devel- to such questions as the following: oping countries can effectively participate in the management/governance systems that may • What effects, positive or negative, are ICTs emerge from the WSIS process. having on the economic prospects of developing countries? What lessons from available experience can be applied to ICT policy- ICT and economic development in the run-up making in the areas that affect trade, enter- to the next phase of the WSIS prise development or employment? The WSIS Plan of Action emphasizes the role of • What strategies have proved successful in national e-strategies as key instruments for the terms of enabling enterprises, especially advancement of the information society in devel- SMEs, to become more competitive through oping countries. It also calls for action to promote the use of ICTs? development-oriented ICT applications for all, in • How can ICTs be used to facilitate the par- particular the use of ICT by small and medium- ticipation of developing countries’ SMEs in sized enterprises (SMEs) to foster innovation, national and international supply chains? achieve gains in productivity, reduce transaction costs and combat poverty. The treatment of these • What effects will ICT-induced changes, at issues in the WSIS context should contribute to the level of the firm and of the whole econ- the emergence of a consensus about the national omy, have on labour markets? What poli- policies under which, and the international envi- cies may facilitate equitable outcomes for ronment in which, a higher degree of ICT take-up these processes?

2. E-BUSINESS AND SMALL AND MEDIUM-SIZED ENTERPRISES

The adoption of ICTs by enterprises has grown site presence to the complete integration of busi- considerably over the past few years, with more ness functions. The latter, however, is a major step and more firms connecting to the Internet. Firms for SMEs in developing countries and requires use ICTs for internal automation, for example of management and technical skills, as well as organi- office and production processes, for customer rela- zational changes and investments that can often tions and supply chain management, or for the not be afforded. The Report investigates the management of distribution and logistics net- uptake of ICTs by SMEs in developing countries works. Internet use may range from simple web- on the basis of available surveys and studies. It

E-COMMERCE AND DEVELOPMENT REPORT 2003 xx OVERVIEW thus provides an overview of ICT usage and e- sized companies as regards basic access to and use business in SMEs and makes suggestions for poli- of the Internet (such as e-mail). However, the cies that could enhance the adoption of ICTs by more complex tasks, in particular automating and businesses. integrating business processes, are carried out much less frequently by SMEs. E-commerce is still The Report first provides an overview of how rare and small companies use more e-market- ICTs change traditional business processes, such as places, whereas medium-sized companies use com- marketing, sales and purchases, production and pany websites (of third parties or their own) for inventory control or finance and human resource selling online. Service companies are the most management. Looking at statistical evidence from active users of ICTs and the Internet, followed by developed countries, it shows that ICT usage usu- trade and manufacturing (the least active). This ally increases with the size of companies, although corresponds to findings in other developing SMEs have been found to have the greatest poten- regions and is partly explained by the fact that tial for productivity gains through e-business. But functions such as marketing and selling services in order to achieve these benefits, firms also need online require basic Internet access and website to have good managerial capacities, technical skills presence, and less system integration related to, and innovation, which may be harder for SMEs in for example, supply and value chain management, developing countries to afford. as is the case in manufacturing.

An assessment of ICT usage by SMEs in develop- The main perceived barrier to Internet uptake is ing Asia and Africa shows that, generally speak- very similar across companies from both devel- ing, many firms have connected to the Internet oped and developing countries. Firms already and actively use it for communicating with suppli- using the Internet consider the lack of network ers and customers. This is particularly true for security to be the key problem, followed by slow companies in urban areas, whereas the urban– and unstable connections. Another important rural digital divide excludes many SMEs located finding is that for many companies the main rea- outside the major cities. Nevertheless, in many son not to go online is not the lack of technical cases Internet use is limited to the owner or man- skills, but the fact that doing so often depends on agers of the enterprise, and little has been done to management capacities and the overall ICT aware- take full advantage of the opportunities offered by ness of the company owner. the new technologies. Studies show that profitability is key to SMEs' willingness to go online. The Report concludes that getting access to the Despite the fact that several studies have demon- Internet is not a major problem for most firms – strated the correlation between ICT adoption and even if connections are mostly slow. Much more firm profitability/productivity, one of the major difficult is to fully integrate the companies’ busi- reasons for not using ICTs (from the viewpoint of ness functions using ICTs, and even more so for the company owner) is the perceived limited SMEs in developing countries. The surveys also impact on business profitability, often coupled confirm that there is a certain evolution over time with the argument that few suppliers and custom- that all companies will go through when adopting ers are online. On the other hand, if companies ICTs. For SMEs, it is relatively easy to start using experience a positive impact on their business, for PCs, then connect to the Internet using e-mail, example an increase in the number of customers, and thereafter set up a web page. However, intro- they are willing to invest in hardware and connec- ducing the Internet into their business activities tivity. In other words, the readiness of SMEs to (internal or external, including e-commerce) does invest in ICTs is not necessarily a cost factor. not follow straight away and larger companies are more likely to automate their business processes A survey of SMEs in five Latin American coun- (and to do so earlier) than smaller companies. tries (Chile, Colombia, Costa Rica, Mexico and Venezuela) – carried out jointly by UNCTAD One explanation is that most SMEs have no and FUNDES – reveals details about the use of defined e-business strategy. Putting in place more ICTs and the Internet at the firm level. The results complex e-business systems, intranets or extranets, show that the availability of personal computers and linking up with suppliers’ and customers’ (PCs), the Internet and ICTs is high among com- computer systems, both require not only technical panies located in urban areas, and there are no sig- know-how but also a solid analysis of the costs nificant differences between small and medium- and benefits implied by the necessary investments,

E-COMMERCE AND DEVELOPMENT REPORT 2004 OVERVIEW xxi and convincing arguments in favour of them. On Third, if SMEs are to make the leap from simple the other hand, SMEs have the advantage of (and low-cost) Internet use, such as e-mail and web implementing strategic and organizational changes search, to building e-business systems fully inte- much more quickly (and at lower cost) than large grated with those of their customers and suppliers, companies. This flexibility should provide them additional investments are required, as well as the with a competitive edge when it comes to the necessary technical and managerial skills to plan adoption of e-business. and successfully implement an e-business strategy. These are clearly areas where public and private The Report points to a few areas for policy-making. agencies can play a crucial role in support of SMEs. First, SMEs need access to reliable, low-cost connections, where dial-up services are often sufficient. Finally, the review of the e-business surveys Therefore, and to bridge the urban–rural divide, showed how difficult it is to make cross-country the emphasis should be on providing universal comparisons, even on such simple indicators as good-quality basic access. Naturally, this should be Internet and e-mail use or web site presence in followed by high-speed connections to allow com- companies, given the available data and statistics. panies to move towards full integration of e-busi- In order to have a comparable and representative ness. Second, trust in a legal and regulatory envi- picture of ICT readiness and use, the continuous ronment supportive of the Internet economy is collection of data through official statistical essential if companies are to engage in e-business. sources is required.

3. CREATIVE INDUSTRIES AND DIGITAL AND INTERNET TECHNOLOGIES: THE CASE OF MUSIC

Music-making is a talent-based and laborious activ- advocacy groups have frequently claimed the con- ity. Developed countries used to have advantages trary, but often accept that file sharing of copy- in technology, but the general progress in comput- righted content is plainly illegal. ing and the Internet is rapidly eliminating any difference. Developing countries need to look to Nonetheless, the entertainment industry has suc- using technologies to promote and popularize cessfully argued for an increase in the strength of their musical capacities and seek earnings from copyright legislation and enforcement with Gov- performance. The global entertainment sector has ernments and international organizations. In the recently been more concerned about restricting meantime, it is seeking to develop a for-pay alter- illicit use of copyrighted content, and thus may native to illegal p2p downloading. With one minor provide only marginally relevant guidance for art- exception, none of these portals are p2p and there- ists and industry in developing countries. fore may not be universally accepted by consumers. Their popularity will be inversely related to the Digital and Internet technologies and music are a strength and diversity of the copy-protection tech- near-perfect match. Music has escaped from its nologies used and the variety of proprietary file guardians – the recording and publishing compa- standards. The creative and business power of the nies – and is being freely exchanged and experi- Internet will be greatly advanced when artists, enced on the Internet’s peer-to-peer (p2p) net- industry and audiences discover how to commer- works. The music industry has recognized that cialize p2p file sharing. Solutions were found in the the advance of broadband Internet and p2p tech- past for other problematic technologies: FM radio, nologies is foundational, and is reacting to contain cassette tapes and videotape recorders. However, as possible damage until developments play out with current developments show, the large music com- greater clarity. Positions and arguments have panies are unlikely to set the pace, particularly become polarized. The music industry claims that, since they are still recovering from the Internet physical piracy aside, file sharing is hurting sales bubble. This leaves the field wide open for technol- and, it follows, songwriters’ and musicians’ earn- ogy companies that may not experience unmanage- ings – as well as their own corporate profits. able levels of anxiety from the threat of technolog- Academia, consumer rights groups, and liberal ical change.

E-COMMERCE AND DEVELOPMENT REPORT 2004 xxii OVERVIEW

The opportunities offered by technology require a able copyright environments. The international change in the business model of artists and indus- music industry will continue to lobby for elimi- try alike. Changing business models is in itself a nating any perceived trade restrictions on the risky business. But the music industry is no import of cultural goods and services. At the same stranger to risk taking. Indeed, only 5 to 10 per time, developing nations need to re-examine cent of its releases achieve profitability, albeit GATS support for “mode four” delivery of enormous. From the artists’ perspective, digital services through the movement of natural persons and Internet technologies offer the opportunity of in order to improve conditions for travel their art- greater independence and artistic control. First, ists by when the latter are pursuing performance the Internet provides access to information on the income. commercial mechanics of the mainstream music business, allowing artists to assess what revenue Developing countries with large national and mix (recording, song writing, performing, etc.) diaspora markets, such as Brazil, India and China, and accordingly, what investments, will maximize will improve their grasp of technology and will their income for a given degree of artistic and undoubtedly succeed in increasing international commercial freedom. Secondly, the capacities of sales of CDs as well as venture into online for-pay modern digital recording and production tech- downloading. The artistic and cultural communi- nologies are ground-breaking: the ability of the ties need to fully appreciate the commercial details Internet to introduce artists to an audience, dis- of the industry at an international level in order to tribute their music and provide a conduit for a optimize their revenue mix (recording, compos- more personal relationship has no historical paral- ing, performing). The essential question will be lel. From an audience perspective, even though one of scaling costs to activities and choosing the modern law allows audiences only to “use” pub- appropriate technologies. Ambitions need to be lished or recorded music, most listeners experi- given a realistic dimension, if being understood ence a cognitive and emotional appropriation of a that the bulk of major releases do not achieve given composition: thus sharing music online profitability. Given the statistical improbability of may, mistakenly, not seem to be a breach of major earnings from recording, artists may be licence or property. In any case, it is rarely a motivated to develop online activities more fully, breach of musicians’ properties: the record compa- assisting audiences’ discovery of their talent and nies or publishers typically acquire the copyrights thus generating improved revenues in concert per- from artists in return for expected royalties. While formance or by composing for other musicians. reimbursing publishing royalties is not an uncom- Because both traditional copyrights and liberal mon event, recording royalties are a less steady open-source licences require legislation and pro- revenue stream. tection, developing countries need to have in place a legal framework and collecting agencies. This Developed-country music markets are in their will also enable the development of strong mature phase, and future growth will depend on national markets and interaction and business convincing audiences to part with leisure time with the international entertainment industry. dedicated to other activities such as Internet However, artists should not shy away from browsing, watching films on DVD or playing exploring open licensing under the impression computer games – a difficult proposition at best. that it means giving away work and music for Therefore, large developing-country music mar- free. The spectrum of choice is large, while the kets that have growth potential will continue to type of contracts offered by the “majors” to the attract the interest of the “majors” provided that select few and the give-away of the public domain they can establish or improve and maintain work- are but two extreme variants.

E-COMMERCE AND DEVELOPMENT REPORT 2004 OVERVIEW xxiii

4. ONLINE HIGHER EDUCATION: ISSUES FOR DEVELOPING COUNTRIES

Online higher education, which involves the dis- There are programmes like that of IGNOU semination of, access to, and exploitation of around the globe – on small islands in the Pacific, higher education, including research, via the Inter- in Africa, in South America and elsewhere. net, is being explored and promoted as a strategy Online higher education initiatives emerge in dif- to provide further access to education and technol- ferent shapes and forms, from complete new vir- ogy for national and international students. It is tual universities to traditional institutions incor- also being used to promote ICT skills, provide porating the Internet to complement their additional revenues (or extra funding resources) services. The Report identifies five models of and enhance the competitiveness of institutions online higher education in developed and develop- and individuals, at both the national and the inter- ing countries, which clearly arise from particular national level. economic, educational and political contexts as well as from the particular needs and capacities For example, in India students are able to obtain that institutions have to provide innovative and via the Internet a bachelor’s degree in information progressive mechanisms for using the Internet. technology (IT) from the Indira Gandhi Open The strategies for adopting online higher educa- University (IGNOU). IGNOU is building on its tion available to educational institutions in devel- existing structure as a distance education provider. oping countries include customizing programmes With a $200,000 budget it is providing online edu- to the local context, building on existing market cation to 10,000 students, with some content presence or developing regional leadership, and/ developed in-house and other bought from a pro- or options that exploit the experience of other vider in the United Kingdom. institutions, such as partnerships in the provision of content and technology or in the recognition of The Report studies the impact and potential bene- diplomas. fits of online higher education in developing countries by analysing the effect that the Internet is hav- Investment in online higher education whether by ing on higher education and the international students, institutions or national Governments market in educational services. It provides an over- needs to be measured against other priorities and view of current initiatives and indicates some of needs. The Report shows how the economic the key issues for assessing whether online higher rationale to invest in online higher education is education is a sound proposition for students, insti- based not only on possible economies of scale, but tutions, enterprises and Governments in develop- also on the urgent need to find new funding ing countries, and if so, in what circumstances. sources, the potential efficiencies generated by specialization and “modularization” as well as new The current online higher education market is still business models, and the pressure to compete with small (compared with traditional face-to-face edu- other providers. cation) and fragmented (with multiple providers and self-developers providing flexibility, innova- The Internet amplifies current educational trends, tion and plurality but also some confusion). It is including the increasing use of private–public part- more established in developed countries, where a nerships and the involvement of private compa- strong education system, a competitive market nies in education and the internationalization of and ICT infrastructure are in place. These coun- higher education. It also allows the unbundling of tries are also the major exporters of higher educa- education services, thus increasing the specialization services. In developing countries, the Internet tion of the different providers (who include teach- is being progressively introduced into higher edu- ers, IT providers, media and content creators, and cation catering mainly for those able to afford it. institutional managers). More importantly, the Online programs are concentrated in the most Internet is calling into question current business popular and marketable subject areas (business models and is providing further options for access- management, ICTs, and education) and the large ing and using content and software, networking majority are in English. internationally and customizing and reusing

E-COMMERCE AND DEVELOPMENT REPORT 2004 xxiv OVERVIEW higher education services. In particular, it is ques- in higher education; providing incentives for tioning current models of academic research and investing in e-learning and online higher educa- publishing and current legal frameworks and prac- tion so that educational goals are maximized; tices in terms of quality assurance, accreditation developing transparent quality assurance, accredi- and recognition measures as well as in terms of tation and recognition measures; and monitoring intellectual property rights. and measuring economic, educational and social benefits and costs. Governments have an important responsibility to overcome financial, technological and develop- In conclusion, whether or not online higher edu- ment hurdles and promote the development of an cation is a sound option for developing countries educated population. They play a key role in max- depends rather than on potential financial oppor- imizing the potential of online higher education tunities and on the overall capacity to meet spe- initiatives, and particularly in ensuring that such cific educational and developmental goals. Gov- initiatives narrow rather than increase digital ernments’ actions can contribute to making online divides and support local needs and culture. Sug- higher education a sound proposition by creating gestions in this connection include the following: an educational and policy environment that ena- creating awareness and encouraging collaboration bles the expansion of higher education to previ- and dialogue among different stakeholders; foster- ously excluded students, encourages relevant and ing a culture of learning; promoting coherence appropriate learning content and processes, pro- between educational and ICT strategies; support- motes innovation and investment in education, ing the use of open technology and open content and recognizes students’ needs and efforts.

5. E-GOVERNMENT: E-PROCUREMENT AND DEVELOPING E-BUSINESS CAPACITY

ICTs, and particularly the Internet, create the pos- rate adopters of e-procurement claimed savings of sibility of reorganizing and networking govern- between 8 and 15 per cent and returns on investment services to make them more efficient, trans- ment in under a year. However, once strategic parent and user-friendly. One important way in sourcing starts to mature and is factored in, cost which these potential benefits can be realized is savings are reduced. Users of e-procurement sys- through e-procurement, by which government tems could maximize short-term benefits by limit- organizations use the Internet to procure/purchase ing initial deployment, and focusing on smaller goods and services from the private sector, adver- categories first (e.g. office supplies) and on helping tise their needs, select vendors, manage service and suppliers by, for example, offering payment upon fulfilment of contracts, and effect payments. receipt of advice of shipment.

There are incomplete statistical data on the e-pro- Other benefits of e-procurement are in the areas of curement market worldwide, although it can be governance and administration. With respect to generally stated that government is usually the larg- governance, e-procurement facilitates the imple- est purchaser in an economy and that the value of mentation of transparent public decision-making the market is of significant importance to national and is a deterrent to lack of compliance and cor- economies. For example, estimates of the ratio of ruption. In terms of administrative processes, it total procurement for all levels of government in may reduce bureaucracy (including overheads, or OECD countries were at almost 20 per cent of 1998 money spent on administration of services rather national GDP ($4.7 trillion), and at approximately than their delivery) and save expense and time. E- 14 per cent ($816 billion) for non-OECD countries. procurement will also impact on the level of ICT skills among all system users. Although there are tangible benefits to e-procurement in the reduction of prices and process costs, Efficient online transactions with government the achievable return on investment of e-procure- agencies can also act as incentives for businesses of ment projects remains hard to assess. Early corpo- all sizes to adopt ICTs and e-business practices. In

E-COMMERCE AND DEVELOPMENT REPORT 2004 OVERVIEW xxv fact, an e-procurement strategy should explicitly provide them with a simplified way of ordering promote the use of the Internet and e-business sys- and acquiring products and licences; at the same tems among potential suppliers. time they would be able to track software licence acquisitions through online order confirmations Success in the implementation of public e-procure- and summaries. For a Government, acquiring ment tends to result from broad consultation with original, proprietary software and licences allows representatives of government agencies and the it to benefit from the vendor's advice and latest private sector. A key objective of a strategy for all technology. countries is to ensure that e-procurement is approached consistently across all spheres of gov- The cost of commercially available e-procurement ernment and that costs to suppliers are minimized. solutions will depend on whether they involve Furthermore, the process of developing an e-pro- applications that are focused on sourcing activities curement strategy should go through a series of (e.g. bidding, supplier registration, tender manage- phases, each of which requires careful considera- ment) and/or purchasing activities (e.g. electronic tion. The process starts with the definition of the invoicing and payments), or both. When an e-pro- goals and vision of the project, followed by curement solution is being created, the costs analysis and reform of the regulatory framework, incurred by the following will have to be consid- analysis of existing processes, their re-engineering, ered: licensing (software costs are believed to be the choice of a solution and platform, and the for- only 10 per cent of the overall project costs), mulation and implementation of a plan, including external and internal resources, implementation the allocation and management of adequate and maintenance, integration into existing resources, the training of human resources and resource planning solutions, process design, con- often the empowering of lower-level management figuration and customization, training and com- to take decisions. munication, internal systems and bandwidth, software upgrades and reorganization costs. From an An initial e-procurement strategy for a develop- infrastructure point of view, however, e-procure- ing country does not necessarily entail a compre- ment solutions can be stand-alone, with no more hensive e-procurement solution, such as an elec- than a data interface with back-office systems. tronic tendering system, an electronic market This is often seen as an interim solution until all place for the procurement of goods and services resource planning platforms are integrated, such online, or a government website that provides a integration providing the greatest transaction cost single point of entry to all government business benefits. opportunities. The implementation of e-procurement may begin with a single improvement, such An option for financing the implementation of e- as posting online updated tender information. procurement is a build-operate-transfer (BOT) scheme, such as the one adopted by the Govern- Any e-procurement system will require a high ment of Malaysia in order to set up its e-procure- level of interoperability to ensure that no poten- ment system, e-Perolehan. E-Perolehan was tial bidder is excluded because it does not use the financed through a BOT scheme involving an e- same computer systems and applications as the commerce joint venture company consisting of Government. This can be enhanced by the use of Puncak Semangat Sdn. Bhd. and NTT Data Cor- open technologies. Also, free and open source poration, which undertook the total financing of software (FOSS) does not require suppliers to the project in exchange for exclusive service opera- adapt their data to a proprietary format or convert tor rights in respect of the Malaysian supplier them into such a format, such a requirement community. The value of transactions by the end potentially increasing the costs of suppliers and of 2004 is estimated to reach 1 billion Malaysian constituting a barrier to smaller companies. In ringgit ($260 million), with expected growth as addition, the use of FOSS may encourage ICT adoption of the system expands. The average cost spending with local companies and support local per transaction has been reduced from $250 to an SMEs in the ICT sector. FOSS is also easily adapt- average of $17. able to local languages. E-procurement systems are best used for the pur- Nevertheless, proprietary e-procurement solu- chase of those goods and services that are needed by tions remain an option for Governments. Agree- all departments across an organization. These are ments with vendors of proprietary solutions may typically commodities and include office supplies,

E-COMMERCE AND DEVELOPMENT REPORT 2004 xxvi OVERVIEW computers and related equipment, maintenance to the development of ICT and transactional capa- services, and facilities such as meeting rooms and bilities in government that can be applied to other travel. Those things required for the operations of areas, as well as in the business community. Tran- specific departments – civil engineering services for sitional measures can be adopted so that local sup- the construction of a new road, for example – are pliers that initially may not be able to access e-pro- more specific and specialized, and cannot benefit curement systems are not excluded. from the economies of scale that an e-procurement system requires in order to justify its cost. In any case, developing countries should bear in mind that the adoption of e-procurement can be a Governments in developing countries must be scalable process that will limit the waste of limited aware that e-procurement does not necessarily resources and allow users to gradually build up the mean a comprehensive e-procurement solution, relevant capabilities. To maximize initial adop- but rather could entail cost-effective process tion, projects should target first those agencies and improvements that steer a government depart- suppliers that will have immediate use for e-pro- ment in the direction of e-procurement and are curement, enlisting their support and addressing tailored to the available resources. For example, the concerns of government workers whose role orders can be placed by e-mail, or via an integrated might change as a result of innovation. This is online order management system that extends applicable to any e-government project. across the length and breadth of the supply chain. Return on investment will be achieved over time In order to classify the suitability of any e-pro- in terms of cost savings and increased revenue. In curement strategies, developing countries may the context of their e-government strategies and need to consider more than the efficiency benefits, regardless of transactional capabilities, developing carefully evaluating the level of public and private countries that have not already explored e-pro- sector e-readiness and the relevance of partial or curement could envisage the enhancement of G2B fully integrated e-procurement to their own e-gov- interaction by posting tender information and ernment and business development strategies. forms online, and promoting awareness within the business community and the registration of On the one hand, it can be argued that there is little potential suppliers. A portal for transactional serv- use in proposing e-procurement in countries where ices can be a longer-term goal that will result from only certain suppliers will be in a position to take a general process reform that will entail consoli- advantage of it, and where SMEs may be excluded dating and streamlining public procurement and from the public procurement market (offline and related government processes, and enhancing their online). On the other hand, e-procurement can lead transparency.

6. PROTECTING COMPETITIVENESS IN THE ICT SECTOR: THE CASE OF TUNISIA

The Report examines laws and regulatory regimes transborder flows of data. Privacy laws governing designed to control the use and abuse of personal the processing of personal data are particularly data – that is, data that directly or indirectly iden- comprehensive in Europe. In most European juris- tify the individual. In an information economy, dictions it is prohibited to transfer data to another particularly as manifested on the Internet and in jurisdiction that does not provide adequate protec- electronic commerce, personal data have become tion. The “adequacy provision” could affect coun- an increasing by valuable asset. As a consequence, tries without such protection in their business with many developed nations have adopted laws and European countries. Developing countries want- rules to control the use of such data, generally ing to participate in the global information econ- referred to as data protection laws. Different juris- omy and thereby facilitate the free flow of infor- dictions have chosen various approaches to the mation from developed to developing countries problem of data protection, and this has posed therefore have to consider the need for similar laws problems of coordination, especially in case of and rules to protect an individual’s private life.

E-COMMERCE AND DEVELOPMENT REPORT 2004 OVERVIEW xxvii

The Report examines the types of personal data approach involves the adoption of rules addressing that are disclosed through our Internet-related the specific concerns of an industry or trade prac- activities, as well as through the use of the Internet tice, and is most often found in the banking and by others to make available information concern- financial services sector, as well as among profes- ing us. Such data are categorized as those that we sionals such as doctors and lawyers. Self-regulation consent to others collecting and using (consensual or co-regulation looks to those that collect and data) and those that are incidental to our activities, process personal data to adopt and comply with and are obtained with neither our knowledge nor the data protection principles. consent (non-consensual data). Another category that receives special treatment in most legislations All three regulatory approaches address the issue but whose borders vary according to the different of transborder data flows, and the ease with which traditions is that of sensitive data. information, including personal data, can be transferred across national borders, thereby potentially Privacy principles, or fair information process- circumventing or avoiding the regulatory regime ing principles, have been developed by various within which the personal data were originally international organizations to protect an individ- obtained. Controls on the transborder flow of per- ual’s right to privacy with regard to his/her personal data from developed countries may act as a sonal data, and these are highlighted in the barrier to trade with developing countries. The Report. There is general international agreement Report examines the different legal mechanisms about the issues that should be addressed, includ- that may be used to avoid such barriers: adequate ing the process of collection, use and disclosure or comparable control regimes, contracts or “safe to others. The advantage of a principles-based harbour” arrangements. approach to the regulation of data protection is the avoidance of technological redundancy, A survey of member States was carried out. It whether concerning mainframe computer sys- revealed a lack of understanding of the nature and tems or the Internet. importance of data protection regimes and a consequent need for educational initiatives to help While there is general consensus concerning the developing countries address this problem. principles underpinning data protection laws, the Report examines three different approaches to reg- Finally, certain policy recommendations are made ulation of the issue: comprehensive, sectoral and in the Report concerning such matters as the regu- self-regulatory or co-regulatory. The first of these latory costs involved for both the public and the involves the establishment of a regulatory author- private sector, and how to minimize them through ity to oversee compliance with the data protection sectoral and self-regulatory mechanisms, as well as regime and operate as a surrogate for individuals through cooperation with regional trading in the enforcement of their rights. The sectoral partners.

7. ASSESSING COMPETITIVENESS IN THE ICT SECTOR: THE CASE OF TUNISIA

According to recently published economic indi- Government is determined to develop Tunisia ces, Tunisia occupies a leading position among into a knowledge-based society. developing countries with respect to its development of ICTs and competitiveness. This in part Most dependent on the ICT environment is the reflects the efforts made by the Tunisian Govern- ICT sector itself. In Tunisia, the sector has been ment to implement ICT policies on infrastruc- growing rapidly during the past five years, in par- ture, institutions, legislation and education, and ticular software and IT services. In recognition of to create a supportive environment for the adop- the important role that the sector plays in driving tion of ICTs. As host to the second phase of the the country’s technological development, one of World Summit on the Information Society, the the Government’s priorities has been to develop a

E-COMMERCE AND DEVELOPMENT REPORT 2004 xxviii OVERVIEW strong and competitive ICT sector. The Report markets. For example, companies focusing on the presents an analysis of the Tunisian ICT sector regional market (mainly the Arab region and and identifies links between ICT policy measures, Africa) need to develop competitive advantages the national and international business environ- based on firm-specific resources and their proxi- ment, corporate strategies and enterprise perfor- mate business environment. Basic factor advan- mance. It also examines the extent to which tages, such as low labour cost, do not apply in the national ICT policies enable ICT companies to regional market, whereas cultural proximity is enhance their competitiveness, particularly in for- important. By contrast, firms focusing on export eign markets. markets (for example, Western Europe) need to develop basic factor advantages and meet higher The analysis follows Porter’s competitiveness dia- technological requirements, whereas cultural mond model and describes demand and factor con- proximity is less critical. ditions, related and supporting industries and firm structure and strategy, so as to determine the spe- The Report also suggests that the solutions and cific business environment the ICT sector is facing. services offered by the firms are too widespread It also critically evaluates the national ICT strat- and that greater specialization could help increase egy, in particular with respect to ICT infrastruc- the productivity of companies and hence their ture, business development support and IT skills competitiveness. Companies entering the regional and education. The report finds that Internet usage market or markets in developing countries should is still fairly low in the country, despite efforts by focus more on the value added of their products the Government to improve access. While the sup- and services, whereas firms focusing on the Euro- ply of highly skilled labour in ICT-related fields is pean or North American market should take growing, overall adult literacy rates are still low. advantage of basic factor conditions available in These are important areas for policy action to Tunisia (such as low wages). advance the Tunisian information society. As far as the enabling business environment is con- On the basis of a survey of IT service companies, cerned, and the success of government policies to the report concludes that companies need to pre- promote the sector, the Report suggests that more pare to take an important step, namely the leap needs to be done to address the particular needs of from opportunity to strategy. This is particularly firms in the ICT sector. This includes the adoption the case for firms planning to expand their export of policies related to enhancing the ICT infrastruc- businesses. The survey reveals that for companies ture, in particular as regards access, pricing and to keep their competitive advantages, they need to local content, and providing finance, skills and define clear strategies and carry them out success- education, not only in IT-related fields, but also in fully. Strategies have to reflect the firms’ target project management and business development.

E-COMMERCE AND DEVELOPMENT REPORT 2004 Chapter 1

INFORMATION AND COMMUNICATION TECHNOLOGIES FOR ECONOMIC DEVELOPMENT: ISSUES FOR INTERNATIONAL DIALOGUE

In line with the practice of the previous editions financing of ICTs for development have attracted of the E-Commerce and Development Report, the particular attention across the whole spectrum of purpose of this introductory chapter is to provide actors involved in the process. In accordance with some background and context to the analysis con- the mandate received from UNCTAD XI, this tained in the chapters that follow, by describing chapter therefore presents some preliminary some general facts and trends in the area of infor- thoughts of the secretariat concerning the issue of mation and communication technologies (ICTs) Internet governance from the point of view of and its application to economic activity that shape maximizing the benefits for the economies of the environment in which the developments developing countries. It also formulates some addressed by the Report take place. more general proposals as to how the broader questions concerning the economic aspects of the In order to do so, this chapter will update the information society could be addressed by the sec- information on the conditions prevailing for the ond phase of the WSIS, to be held in Tunis in adoption of ICTs in developing countries and con- 2005. sider some of the processes through which policies addressing the ICT-related needs of developing countries can be conceived and carried out, partic- A. The reach of the Internet and ularly as the international community takes action the growth of e-commerce to implement the action plan adopted at the first phase of the World Summit on the Information Society (WSIS), held in Geneva in December 2003. 1. How the net is spreading Accordingly, this chapter has two separate parts: the first one presents information, mainly of a At the end of 2003, nearly 676 million people (or quantitative nature, about the recent evolution of 11.8 per cent of the total population of the world) the basics facts of Internet access and its commer- had access to the Internet, according to estimates cial applications; the second one deals with issues by the International Telecommunication Union linked with the ICT-for-development debate, as (ITU).2 This represents an increase of 49.5 million seen from UNCTAD's perspective. people or 7.8 per cent compared with the figures at the end of 2002. Although the 2003 figures The member States of UNCTAD have mandated were only partially available when this chapter the organization to “contribute to the implemen- was being drafted, there are signs that the growth tation of the WSIS Declaration of Principles and of the world’s “Internet population” is slowing Plan of Action in the area of UNCTAD’s compe- down – most of those who want to have Internet tence, including as regards key development access in the developed world, and many of those aspects of issues pending from the first phase of who can afford it in developing countries, are WSIS and in preparation for the second phase now connected. However, the existence of a large scheduled in Tunis in 2005”.1 Among the issues potential demand in developing countries will that were discussed more intensively all through ensure the addition of large numbers of new users the WSIS process but were left pending for further to the global Internet in the short and medium work following the conclusion of its first phase, terms. Table 1.1 shows the growth in the number the questions of the governance arrangements that of Internet users in the world for the period should be applicable to the Internet and the 2000–2003.

1 2 CHAPTER 1: ICT FOR ECONOMIC DEVELOPMENT: ISSUES FOR INTERNATIONAL DIALOGUE

Table 1.1 Internet users worldwide (thousands), 2000–2003

2003 2002 2001 2000 Thousands 675 678 626 579 495 886 387 532 % change 7.84 26.36 27.96 ..

Source: ITU (2004).

Table 1.2 Internet users by region, 2000–2003 (thousands)

Source: ITU (2004) data and UNCTAD calculations.

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 1: ICT, FOR ECONOMIC DEVELOPMENT: ISSUES FOR INTERNATIONAL DIALOGUE 3

Chart 1.1 Internet users in developed and developing countries, 2000 and 2003

Source: ITU (2004) data and UNCTAD calculations.

Table 1.3 Internet users in selected economies (thousands)

Change Change %change %change 2003 2002 2001 2000 2003–2002 2003–2000 2003–2002 2003–2000 Africa 12 123 9 988 6119 4 559 2 134 7 564 21.37 165.92 Algeria* 500 500 200 150 .. 350 .. 233.33 Egypt 2 700 1 900 600 450 800 2 250 42.11 500.00 Kenya* 400 400 200 200 .. 200 .. 100.00 Morocco 800 700 400 200 100 600 14.29 300.00 Nigeria 750 420 115 80 330 670 78.57 837.50 South Africa* 3 100 3 100 2 890 2 400 .. 700 .. 29.17 Togo 210 200 150 100 10 110 5.00 110.00 Tunisia 630 506 410 250 125 380 24.63 152.00 Zimbabwe* 500 500 100 50 .. 450 .. 900.00 Others** 2 533 1 763 1 054 679 770 1 854 43.70 273.21

Latin America & Caribbean 44 217 42 439 29 224 17 673 1 778 26 544 4.19 150.20 Argentina* 4 100 4 100 3 650 2 600 .. 1 500 .. 57.69 Brazil* 14 300 14 300 8 000 5 000 .. 9 300 .. 186.00 Chile* 3 576 3 576 3 102 2 537 .. 1 038 .. 40.92 Colombia 2 732 2 000 1 154 878 732 1 854 36.61 211.18 Mexico* 10 033 10 033 7 410 2 712 .. 7 321 .. 269.89 Peru 2 850 2 400 2 000 800 450 2 050 18.75 256.25 Venezuela* 1 274 1 274 1 153 820 .. 454 .. 55.41 Others*** 5 352 4 756 2 756 2 325 596 3 027 12.53 130.17

North America* 175 110 175 110 156 823 136 971 .. 38 139 .. 27.84 United States* 159 000 159 000 142 823 124 000 .. 35 000 .. 28.23 Canada* 16 110 16 110 14 000 12 971 .. 3 139 .. 24.20

E-COMMERCE AND DEVELOPMENT REPORT 2004 4 CHAPTER 1: ICT FOR ECONOMIC DEVELOPMENT: ISSUES FOR INTERNATIONAL DIALOGUE

Table 1.3 (continued)

2003 2002 2001 2000 Change Change %change %change 2003–2002 2003–2000 2003–2002 2003–2000 Asia 243 406 211 202 150 535 109 257 32 204 134 149 15.25 122.78 China 79 500 59 100 33 700 22 500 20 400 57 000 34.52 253.33 Hong Kong (China) 3213 2919 2601 1855 294 1358 10.07 73.18 India 18 481 16 580 7 000 5 500 1 901 12 981 11.47 236.02 Indonesia* 8000 8000 4000 2000 .. 6000 .. 300.00 Israel* 2 000 2 000 1 800 1 270 .. 730 .. 57.48 Japan* 57 200 57 200 48 900 38 000 .. 19 200 .. 50.53 Korea, Rep. of 29 220 26 270 24 380 19 040 2 950 10 180 11.23 53.47 Malaysia 8692 7841 6347 4000 852 4692 10.86 117.30 Philippines* 3 500 3 500 2 000 1 540 .. 1 960 .. 127.27 Singapore* 2100 2100 1700 1300 .. 800 .. 61.54 Taiwan P. of China 8 830 8 590 7 820 6 260 240 2 570 2.79 41.05 Thailand 6031 4800 3536 2300 1231 3731 25.65 162.23 Others** 16 639 12 302 6 751 3 692 4 337 12 947 35.25 350.71

Europe 188 997 176 232 143 584 110 824 12 764 78 172 7.24 70.54 France 21 900 18 716 15 653 8 460 3 184 13 440 17.01 158.87 Germany 39 000 36 000 31 000 24 800 3000 14 200 8.33 57.26 Italy 18 500 19 900 15 600 13 200 -1 400 5 300 -7.04 40.15 Netherlands 8 500 8 200 7 900 7 000 300 1 500 3.66 21.43 Poland 8970 8880 3800 2800 90 6170 1.01 220.36 Russian Federation* 6 000 6 000 4 300 2 900 .. 3 100 .. 106.90 Spain 9789 7856 7388 5486 1933 4303 24.61 78.44 Sweden* 5 125 5 125 4 600 4 048 .. 1 077 .. 26.61 Turkey 5500 4900 4000 2000 600 3500 12.24 175.00 United Kingdom* 25 000 25 000 19 800 15 800 .. 9 200 .. 58.23 Others** 40 713 35 655 29 543 24 330 5057 16 382 14.18 67.33 00 Oceania 11 825 11 607 9601 8248 218 3577 1.87 43.37 Australia* 9 472 9 472 7 700 6 600 .. 2 872 .. 43.52 New Zealand 2110 1908 1762 1515 202 595 10.59 39.27 Others** 243 227 139 133 16 110 6.86 83.12

Source: ITU (2004) and UNCTAD calculations. * 2002. ** Includes countries reporting data for 2003 and 2002. *** Includes countries reporting data for 2003, 2002 and 2001.

These data indicate that in demographic terms them, far more limited than in industrialized the presence on the Internet of the developing nations. In spite of rapid rates of improvement countries as a whole is already large enough to in the penetration ratios of developing coun- represent a significant factor in the development tries, these are ten times lower than the average of global, ICT-based social and economic of the developed world. Table 1.4 and chart 1.2 exchanges. The picture looks less impressive, summarize information in this regard. Table 1.5 however, when relative magnitudes are consid- provides information for a number of selected ered. The low figures for Internet penetration countries, including countries that are not (number of users as a share of the total popula- included in table 1.3 because of their small size tion) indicate that the depth of penetration of but which have achieved penetration rates above ICTs into the social fabric remains, in most of the average of their region.

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 1: ICT, FOR ECONOMIC DEVELOPMENT: ISSUES FOR INTERNATIONAL DIALOGUE 5

Table 1.4 Internet users per 10,000 people by region, 2002–2003

2003 2002 % change Africa 148 124 19.62 Asia 674 584 15.40 Europe 2373 2212 7.29 Latin America & Caribbean 832 808 2.97 North America* 5476 5476 .. Oceania 3 764 3 705 1.60

Developed countries 4 495 4 474 0.48 Developing countries 501 429 16.78 Others 1 000 837 19.50 World 1108 1028 7.77

Source: ITU (2004) and UNCTAD calculations. * 2002.

In addition to this demographic approach, another ical location, and because even hosts using country way to look at the growth of the Internet is to code TLDs (ccTLDs), for example .ad for Andorra consider the evolution of the number of hosts that or .zw for Zimbabwe, are not necessarily located are connected to it. According to a survey spon- physically in the corresponding country,4 it is dif- sored by the Internet Systems Consortium and ficult to draw conclusions about the ranking and produced by Network Wizards, the number of performance of countries in terms of their absolute Internet hosts worldwide grew by 35.8 per cent and relative number of hosts. However, it is possi- between January 2003 and January 2004, reaching 3 ble to detect some trends in terms of the growth in a total of over 233 million. This rate of growth is the use of particular ccTLDs that could be indica- more than twice as rapid as that observed in 2002 tive of the attractiveness of a particular TLD. Such and is similar to that of 2001 (see chart 1.3 for attractiveness may, at least in part, be indicative of details of the growth over recent years). the prevailing conditions for the spread of the Inter- net in the territory in question, although of course Because the majority of existing hosts belong to the regulatory and commercial environment under generic top level domains (TLDs) such as .net or which a particular generic or country code TLD .com, which cannot be linked to a specific geograph- operates may be equally or even more significant.

Chart 1.3 Chart 1.2 Internet hosts, 2000–2004 Internet users per 10,000 people, 2003

Source: ITU (2004) data and UNCTAD calculations. Source: Internet Systems Consortium (2004).

E-COMMERCE AND DEVELOPMENT REPORT 2004 6 CHAPTER 1: ICT FOR ECONOMIC DEVELOPMENT: ISSUES FOR INTERNATIONAL DIALOGUE

Table 1.5 Internet users per 10,000 people, selected economies, 2001–2003

2003 2002 2001 Africa** 148 124 78 Algeria* 160 160 65 Botswana* 349 349 297 Cape Verde 444 355 271 Egypt 393 282 93 Gabon 262 192 135 Gambia* 188 188 139 Kenya* 127 160 64 Lybian Arab Jamahiriya 289 225 36 Mauritius 1 229 1033 883 Morocco 266 236 137 Namibia 338 267 246 Nigeria 61 35 10 SaoTome&Principe 987 728 600 Senegal 217 104 102 Seychelles* 1 452 1452 1 099 South Africa* 682 682 649 Swaziland 259 194 137 Togo 420 410 316 Tunisia 637 517 424 Zimbabwe* 430 430 87 Latin America & Caribbean*** 832 808 563 Antigua & Barbuda* 1 282 1 282 904 Argentina* 1 120 1120 1 008 Bahamas 2 649 1 923 551 Barbados 3 708 115.24 559.08 Belize* 1 089 1088.53 699.55 Brazil* 822 822 466 Chile* 2 375 2375 2 014 Colombia 624 462 270 Costa Rica* 1 931 1931 934 Guyana* 1 422 1 422 1 149 Jamaica* 2 285 2285 383 Mexico* 985 985 738 Peru 1 039 897 766 Saint Kitss & Nevis* 2 128 2 128 781 Trinidad & Tobago* 1 060 1060 923 Uruguay [2001] 1 190 1 190 1 190 Venezuela* 506 506 466 North America* 5 476 5 476 4 964 Canada* 5 129 5129 4 500 United States* 5 514 5 514 5 015 Asia** 674 584 417 Bahrain 2 819 2 456 2 034 Brunei Darussalam (2001) 1 023 1023 1 023 China 632 460 257 Hong Kong (China) 4 692 4 301 3 868 India 175 159 68

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 1: ICT, FOR ECONOMIC DEVELOPMENT: ISSUES FOR INTERNATIONAL DIALOGUE 7

Table 1.5 (continued) 2003 2002 2001 Indonesia* 377 377 191 Israel* 3 014 3 014 2 766 Japan* 4 489 4489 3 842 Jordan 834 577 452 Korea, Rep. of 6 034 5519 5211 Kuwait 2 308 1 058 879 Lebanon* 1 171 1171 776 Macao (China) 2 687 2 604 2 313 Malaysia 3 453 3197 2 656 Oman* 709 709 484 Philippines* 440 440 256 Qatar 1 974 1 134 670 Singapore* 5 044 5044 4115 Taiwan Prov. of China 3 900 3 814 3 490 Thailand 965 776 577 United Arab Emirates 2 748 2 709 2 571 Europe** 2 373 2212 1 798 Austria 4 620 4 147 3 922 Belgium* 3 283 3283 3 104 Cyprus* 2 937 2 937 2 175 Czech Republic 2 683 2563 1 467 Denmark* 5 128 5 128 4 295 Estonia* 3 277 3277 3 005 Finland* 5 089 5 089 4 303 France 3 656 3138 2 638 Germany 4 727 4 362 3 760 Iceland 6 747 6479 5 993 Ireland 3 130 2 803 2 331 Italy 3 367 3524 2 689 Latvia 4 057 1 331 723 Luxembourg* 3 700 3700 3 640 Malta* 3 030 3 030 2 526 Netherlands 5 219 5063 4 905 Norway* 5 026 5 026 4 642 Poland* 2 325 2300 984 Russian Federation* 409 409 293 Slovakia 2 559 1604 1 253 Slovenia* 3 758 3 758 3 008 Spain 2 391 1931 1 827 Sweden 5 731 5 731 5 163 Switzerland* 3 510 3510 3 070 Turkey 805 728 604 United Kingdom* 4 231 4 231 3 296 Oceania** 3 764 3 705 3 124 Australia* 4 817 4817 3972 New Zealand 5 262 4 840 4 612 Source: ITU (2004) * 2002. ** Includes countries reporting data for 2003 and 2002. *** Includes countries reporting data for 2003, 2002 and 2001.

E-COMMERCE AND DEVELOPMENT REPORT 2004 8 CHAPTER 1: ICT FOR ECONOMIC DEVELOPMENT: ISSUES FOR INTERNATIONAL DIALOGUE

Table 1.6 Number of hosts advertised in the Domain Name System

2004 2003 % change Networks net 100 751 276 61 945 611 62.64 Commercial com 48 688 919 40 555 072 20.06 Japan jp 12 962 065 9 260 117 39.98 Educational edu 7 576 992 7 459 219 1.58 Mistakes arpa 6 146 841 6 387 463 -3.77 Italy it 5 469 578 3 864 315 41.54 United Kingdom uk 3 715 752 2 583 753 43.81 Germany de 3 421 455 2 891 407 18.33 Netherlands nl 3 419 182 2 415 286 41.56 Canada ca 3 210 081 2 993 982 7.22 Brazil br 3 163 349 2 237 527 41.38 Australia au 2 847 763 2 564 339 11.05 Taiwan Province of China tw 2 777 085 2 170 233 27.96 France fr 2 770 836 2 157 628 28.42 United States us 1 757 664 1 735 734 1.26 Sweden se 1 539 917 1 209 266 27.34 Denmark dk 1 467 415 1 154 053 27.15 Belgium be 1 454 350 1 052 706 38.15 United States Military mil 1 410 944 1 880 903 -24.99 Mexico mx 1 333 406 1 107 795 20.37 Organizations org 1332978 1 116 311 19.41 Poland pl 1 296 766 843 475 53.74 Finland fi 1 224 155 1 140 838 7.30 Spain es 1 127 366 1 694 601 -33.47 Switzerland ch 1 018 445 723 243 40.82 Norway no 1 013 273 589 621 71.85 Austria at 982 246 838 026 17.21 Argentina ar 742 358 495 920 49.69 United States Government gov 676 595 607 514 11.37 Israel il 634 001 230 167 175.45 Russian Federation ru 617 730 477 380 29.40 Hong Kong, China hk 591 993 398 151 48.69 Singapore sg 484 825 338 349 43.29 New Zealand nz 474 395 432 957 9.57 Turkey tr 344 859 199 823 72.58 Czech Republic cz 315 974 239 885 31.72 Hungary hu 313 576 254 462 23.23 Portugal pt 299 923 291 355 2.94 South Africa za 288 633 198 853 45.15 Republic of Korea kr 253 242 407 318 -37.83 Unknown .. 250 416 236 291 5.98 Greece gr 245 650 202 525 21.29 Chile cl 202 429 135 155 49.78 China cn 160 421 156 531 2.49 Romania ro 141 202 91 670 54.03 Colombia co 115 158 55 626 107.02 Estonia ee 113 154 109 643 3.20

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 1: ICT, FOR ECONOMIC DEVELOPMENT: ISSUES FOR INTERNATIONAL DIALOGUE 9

Table 1.6 (continued)

2004 2003 % change Ireland ie 111 467 97 544 14.27 Malaysia my 107 971 86 285 25.13 Iceland is 106 296 68 282 55.67 Thailand th 103 700 100 132 3.56 Slovakia sk 98 788 80 660 22.47 United Arab Emirates ae 97 200 56 679 71.49 Ukraine ua 96 214 62 714 53.42 Uruguay uy 87 630 78 660 11.40 India in 86 871 78 595 10.53 Peru pe 65 868 19 447 238.71 Dominican Republic do 64 197 45 508 41.07 Indonesia id 62 036 61 279 1.24 Cocos (Keeling) Is. cc 58 296 35 684 63.37 Croatia hr 53 333 40 933 30.29 Bulgaria bg 51 424 29 257 75.77 Lithuania lt 44 664 37 840 18.03 Philippines ph 27 996 38 440 -27.17 Subtotal 232 470 584 171 150 038 35.83 World 233 101 481 171 638 297 35.81 Source: Internet Systems Consortium (2004).

Table 1.6 compares the number of hosts adver- among the top performers. At the other end of the tised in the Domain Name System (DNS) in Janu- ranking, of the five TLDs that recorded a decrease ary 2003 and in January 2004 for domain names in the number of hosts in 2003, two correspond to accounting for over 99 per cent of all the hosts developing countries (.kr of the Republic of Korea counted by the Internet Systems Consortium. and .ph of the Philippines). The most likely expla- Most of the top positions in the table are occupied nation for these movements is a migration by generic TLDs, under which the majority of towards generic TLDs, as other indicators (such as hosts based in the United States and, increasingly, the number of Internet users and of computers other countries operate. In January 2003, the only available) in these two countries continued to TLDs corresponding to developing countries that grow in 2003. ranked among the first 40 by number of hosts were those of Brazil (.br), Taiwan Province of The difficulty of drawing conclusions about the China (.tw), Mexico (.mx), Argentina (.ar), the geographical distribution of hosts is illustrated by Republic of Korea (.kr), Hong Kong (China) (.hk) table 1.7, which contains data from the ITU and Singapore (.sg). By January 2004 the ccTLDs (which in turn uses in part data from the ISC sur- of Turkey (.tr) and South Africa (za) had joined vey) and shows numbers that are rather different the top 40 of the Internet Domain Name Survey in several respects, notably the total number of of the Internet Software Consortium (ISC). hosts (which would have declined in 2003 by almost two thirds). The most likely explanation of In terms of rates of growth, of the 26 TLDs that this apparent contradiction seems to be the elimi- experienced above-average growth, 12 correspond nation from the data of information concerning to developing countries and another four to coun- generic TLDs which had until now been attrib- tries of Central and Eastern Europe. The ccTLDs uted to the United States, leading to a 98 per cent of Peru (which more than tripled its host count) decrease in the number of hosts in the North and Colombia (which doubled its host count) are American region.

E-COMMERCE AND DEVELOPMENT REPORT 2004 10 CHAPTER 1: ICT FOR ECONOMIC DEVELOPMENT: ISSUES FOR INTERNATIONAL DIALOGUE

Table 1.7 Internet hosts by region

2003 % change 2002 % change 2001

Africa 348 699 43.40 243 171 -11.20 273 836 Asia 18 211 053 36.00 13 390 474 23.88 10 809 244 Europe 22 338 832 21.68 18 358 407 19.87 15 315 888 Latin American and Caribbean 5 897 866 38.79 4 249 420 24.92 3 401 580 North America 4 967 745 -95.80 118 305 940 8.45 109 083 612 Oceania 3 360 659 10.75 3 034 390 11.10 2 731 107

Developed countries 41 022 171 -72.08 146 943 541 10.79 132 631 004 Developing countries 11 457 617 32.19 8 667 836 17.71 7 363 438 Others 2 645 066 34.24 1 970 425 21.57 1 620 825 World 55 124 854 -65.02 157 581 802 11.27 141 615 267 Source: ITU (2004) data and UNCTAD calculations.

The main ways in which most Internet users use sites. The number of active sites grew slightly the Internet for business purposes are exchanging faster – by 26.39 per cent–in the 12 months to e-mail, accessing the World Wide Web (www) for June 2004. information or transactional purposes or setting up a company website. Websites represent the One indicator of the use of the World Wide Web main gateway to the Internet for both business-to- for business purposes is the number of websites consumer and business-to-business transactions. using the secure socket layer protocol (SSL), The evolution of the number of www servers in which supports secure transactions (although the world therefore has some usefulness as an indi- most businesses use the Web for other purposes). cator of the growth of e-business. A regular survey According to another Netcraft survey, this grew 5 conducted by the company Netcraft.com found by 56.7 per cent in the 12 months between April that as of June 2004 there were over 51,635,000 2003 and April 2004, thus reaching 300,000.6 Serv- websites worldwide. This represents an increase of ers using SSL are used mostly for e-commerce, e- 26.13 per cent compared with the same month in payments and e-banking transactions, as well any 2003. The nearly 10.7 million new sites added to other transaction in which there is a need for the Web in just one year represent a significant secure exchange of information. Table 1.8 shows acceleration when it is remembered that the Web the changes in some of the aspects measured by took 21 months to grow from 30 to 40 million the Netcraft surveys between 2003 and 2004.

Table 1.8 The World Wide Web, 2003-2004

2003 2004 % growth

Host names (June to June) 40 936 076 51 635 284 26.14 Active sites (June to June) 17 284 461 21 846 167 26.39

SSL servers (April to April) 191 449 300 000 56.70

Source: Netcraft.com (2004a), (2004b).

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 1: ICT, FOR ECONOMIC DEVELOPMENT: ISSUES FOR INTERNATIONAL DIALOGUE 11

2. Summing it all up associated.9 Starting from a project to devise a Dig- ital Divide Index, which would track the diffusion The paragraphs above show different angles from and uptake of ICTs, Orbicom’s project has devel- which one can evaluate the possibility of accessing oped into a model based on a conceptual frame- and using ICTs, and particularly the Internet, in work that incorporates not only considerations the various parts of the world. Attempts have concerning connectivity and e-readiness, but also been made to aggregate this information in e-read- ICT-relevant skills and the use that people and iness indicators, some of which were commented companies make of them. This is reflected in a on in chapter 1 of the E-Commerce and Develop- country's Infostate, which aggregates Infodensity ment Report 2003. More recently, the ITU has (available stocks of ICT capital and labour, includ- launched its digital access index, which aims at ing networks and ICT skills), and Info-use (uptake measuring the overall ability of people to access and consumption flows of ICTs as well as the and use ICTs. It synthesizes information about intensity of their use). eight variables corresponding to five categories (infrastructure, affordability, knowledge, quality A crude summary of the findings of the initial and usage).7 application of Orbicom’s model would be the confirmation of the gap that separates the most Some interesting results of this exercise include ICT-advanced countries such as the United States the fact that three developing economies (the and Canada, a number of Western European Republic of Korea, Hong Kong (China) and Tai- countries (all the Scandinavian countries, the Ben- wan Province of China) rank among the top ten, elux countries, Switzerland, the United Kingdom and above the United States, which ranked only and Germany) and a number of economies in Asia eleventh. Of the five economies that had and the Pacific (Japan, Republic of Korea, Hong improved their performance most between 1998 Kong (China), Singapore, Australia and New Zea- and 2003, four (the three previously mentioned land), all of which have attained very high Infos- plus Singapore) were developing countries in Asia. tate (200 compared with a world average of 100), Of the four categories of digital access into which from the lowest-ranking group of mostly African countries were grouped according to their index countries (Chad, Ethiopia, Central African (high, upper, medium and low), countries from Republic, Eritrea and Malawi) and Asian countries Central and Eastern Europe, the Caribbean, the (Myanmar and Bangladesh) with Infostates as low Gulf States and some emerging Latin American as 5. Both Infodensity and Info-use were found to countries are predominant in the second one. be contributing to the digital divide between Other developing countries ranked in the lower countries. From the point of view of the evolution two categories, with the lowest five places corre- of Infostates over time, all countries seem to be sponding to Africa, which only had one country improving, but at widely varying paces. While the (Mauritius) in the “upper access” category. A con- international digital divide seems to be closing, clusion drawn by the authors of the ITU classifica- this is happening only at a slow rate and for the tion was that limited infrastructure could no most part is attributable to countries towards the longer be considered the main barrier that devel- middle of the rankings, while those in the most oping countries face with regard to ICTs. Afforda- difficult situation are not seeing much progress. bility and education, two factors in which public While income levels and higher Infostates show a policies can make a significant impact, are equally positive correlation, notable exceptions exist: important factors. The good performance of sev- countries with similar levels of gross domestic eral Asian countries would also point to the possi- product (GDP) show very different Infostates, and bility of achieving high levels of accessibility to vice versa. ICT policy choices can make a noticea- and use of ICTs without widespread familiarity ble difference. with the English language, which is another factor commonly quoted as a bottleneck for the The data discussed above consistently point to the increased adoption of ICTs in developing coun- increasing availability of the material and immate- 8 tries. rial basis on which e-business and e-commerce can grow, including in many developing countries. A more comprehensive approach has been taken The effects of the crisis of confidence of 2001 in by Orbicom, the Network of UNESCO Chairs in the potential of the “information economy” seem Communications, with which UNCTAD is now to have completely dissipated, and the conditions

E-COMMERCE AND DEVELOPMENT REPORT 2004 12 CHAPTER 1: ICT FOR ECONOMIC DEVELOPMENT: ISSUES FOR INTERNATIONAL DIALOGUE for the growth of a digital economy are therefore represents by far the largest share of all e-com- more and more consolidated. The next section merce in the world and continues to set the trends provides some information about the pace at which e-commerce and e-business follow. This which this is happening in the trend-setting e-com- information is complemented with a reference to a merce markets. few notable elements of the statistical evidence recently published by Eurostat concerning the adoption of e-business in the European Union. 3. The growth of e-commerce According to the United States Census Bureau, The situation in the leading markets business-to-consumer (B2C) e-commerce sales in the first quarter of 2004 amounted to 1.9 per cent Several chapters in this Report, as well as in of total retail sales, a proportion that is nearly Reports of previous years, refer to the rarity of sta- twice as large as that of 2001.10 The annual rate of tistically significant measurements of the value of growth of retail e-commerce in the United States e-commerce transactions in most countries, and in the year to the end of the first quarter of 2004 particularly in the developing world. As the situa- was 28.1 per cent, while the rate of growth of total tion in this regard has not changed sufficiently to retail in the same period was only 8.8 per cent. warrant a revision of the remarks made in the On current trends, retail e-commerce in the introductory chapters of the previous two United States could amount to $100 billion by Reports, this chapter will limit itself to a brief sum- mid-2006, at which moment it could represent mary of the evolution of the value of e-commerce between 2.5 and 3 per cent of total retail sales in transactions in the world’s earliest and largest that country. Table 1.9 summarizes B2C sales in adopter of e-commerce, the United States, which the United States over the last three years.

Table 1.9 B2C sales in the United States, 2000-2003 (millions of US dollars)

2003 % growth 2002 % growth 2001 % growth 2000

E-commerce 55 996 26.44 44 287 27.91 34 623 23.65 28 000 Total retail 3 399 544 5.25 3 230 122 2.32 3 156 754 2.82 3 070 186 E-commerce as a per cent of total retail 1.65 20.14 1.37 25.01 1.10 20.26 0.91 Source: US Census Bureau (2004b).

As for business-to-business e-commerce (B2B), the Table 1.10 compares the dollar figures for e-com- United States Census Bureau reports that in 2002 e- merce and total commerce in B2B and B2C in the commerce represented 16.28 per cent of all com- United States in 2001 and 2002. mercial transactions between enterprises, and that B2B amounted to 92.7 per cent of all e-commerce Information compiled by Eurostat indicates that in the United States.11 In a sluggish economic envi- e-commerce sales made through the Internet by ronment that resulted in a decrease of 1.3 per cent in total B2B transactions (traditional and electronic) enterprises located in the European Union compared with 2001, e-commerce B2B grew at a reached €95.6 billion (or $86.04 billion at 2001 12 annual rate of 6.1 per cent. This superior perform- average exchange rates) in 2001. These sales ance of e-commerce B2B compared with “tradi- would represent only 20 per cent of total e-com- tional” transactions occurred in all the major eco- merce sales: according to the Eurostat survey, nomic sectors. Internet sales amounted to 1 per cent of total sales, while electronic data interchange (EDI) and other By sectors of activity, the weight of B2B e-commerce was highest in manufacturing, where it rep- non-Internet sales represented 4 per cent of total resented 19.6 per cent of the value of all shipments. sales in 2001. This would bring total e-commerce E-commerce represented 10 per cent or more of sales in the EU to about $430 billion, less than 40 shipments in 15 of the 21 industry groups into per cent of the total e-commerce sales estimates which manufacturing is divided for the United States for the same year.

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 1: ICT, FOR ECONOMIC DEVELOPMENT: ISSUES FOR INTERNATIONAL DIALOGUE 13

Table 1.10 US shipments, sales, revenues and e-commerce, 2002 and 2001 (billions of dollars)

Value of shipments, sales, or revenue Year to year % change % distribution of E-commerce

2002 2001

Total E-commerce %E-com- Total E-commerce %E-com- Total E-com- 2002 2001 merce/ merce/ merce total total

Total 14 675 1157 7.88 14 585 1 080 7.40 0.60 7.10 100 100 B2B 6 582 1 072 16.29 6 672 1 010 15.14 -1.30 6.10 92.7 93.5 Manufacturing 3840 752 19.58 3971 724 18.23 -3.30 3.80 65 67 Merchant 26.5 wholesale 2 742 320 11.67 2 701 286 10.59 1.50 11.70 27.7 B2C 8093 85 1.05 7913 70 0.88 2.30 21.40 7.3 6.5 Retail 3 230 44 1.36 3 157 34 1.08 2.30 29.30 3.8 3.2 Selected services 4863 41 0.84 4756 36 0.76 2.20 15.00 3.5 3.3

Source: US Census Bureau (2004b). See www.census.gov/eos/www/papers/2002/2002finaltext.pdf for applicable notes and definitions affecting the interpretation of data.

Even when allowance is made for methodological First, the focus on measuring e-commerce transac- differences and the existence of gaps in the data tions might divert attention from measuring other available for the EU (no information is available uses of ICTs in businesses and therefore provide on the percentage of e-commerce sales in total sales only limited information on the adoption of ICTs for Belgium, France and the Netherlands), the dif- by enterprises. Therefore, more and more atten- ference in the significance of e-commerce for the tion is being paid by statistical offices to the meas- two largest developed single markets remains con- urement of e-business – or more broadly the use of siderable. This is in spite of the fact that ICTs have ICTs in enterprises for a variety of business activi- reached very high penetration levels across the EU, ties that go beyond e-commerce. This is important with 94 per cent of all enterprises using computers, since many of the efficiency gains related to the 81 per cent having an Internet connection and 67 adoption of ICTs result from changes in business per cent having a website or a homepage. Of all processes using ICTs, ranging from customer rela- enterprises, many more used the Internet to make tionships and supply chain management to mar- purchases (24 per cent) than sales (10 per cent). Of keting, logistics and distribution. the latter, 83 per cent made less than 10 per cent of their total sales through the Internet, and 46 per Second, experience from measuring e-commerce in cent made less than 2 per cent of their total sales developed countries (and in a few developing coun- using the Internet. tries; see chapter 2) has shown that in most cases, businesses are unable to specify the value of online From e-commerce to e-business statistics purchases and sales, but are willing to provide information on whether they conduct business online. Therefore, the quality of data on the value The above discussion shows the scarcity of reliable of e-commerce transactions is unlikely to improve data on the value of e-commerce, and not only in considerably in the near future. developing countries. Furthermore, the available data from the United States and the European Union show that while the value of online trans- Third, in developing countries, many companies actions is increasing, it is not increasing at the are starting to use the Internet for various business speed at which businesses connect to the Internet. functions, although they are not yet engaged in This leads to a number of suggestions. online transactions. This information needs to be

E-COMMERCE AND DEVELOPMENT REPORT 2004 14 CHAPTER 1: ICT FOR ECONOMIC DEVELOPMENT: ISSUES FOR INTERNATIONAL DIALOGUE

Box 1.1

Partnership on Measuring ICT for Development

Recognizing the need for improved data and indicators on information society developments, a global initiative has been launched that brings together key stakeholders involved in the statistical measurement of ICTs to create a partnership that will contribute to closing the data gap at the international level, and in particular in developing countries. On the basis of the commitments of the partners, which include the ITU, OECD, UNCTAD, the UNESCO Institute for Statistics, the UN Regional Commissions, the UN ICT Task Force and the World Bank, the partnership will work towards defining and collecting a set of common ICT indicators and assisting developing countries in their efforts to produce information society statistics. This will be crucial to measuring the socio-economic impact of ICTs and their potential contribution to the implementation of the Millennium Development Goals (MDG), which is a major objective of the global “ICT for development” community.

The Partnership was officially launched during UNCTAD XI, held in São Paulo, Brazil, from 13 to 18 June 2004. Further information on the partnership is provided on the web site measuring-ict.unctad.org.

captured in an analysis of the adoption of ICTs by tions to enhance the availability of ICT statistics in businesses and its impact on development. developing countries (see box 1.1).

The WSIS Plan of Action points to the need to At the time of completion of the draft of this develop statistical indicators for benchmarking Report, e-business statistics had been received from and performance evaluation, to follow up the Argentina, Chile, Colombia, Morocco, Peru, the implementation of the objectives, goals and targets Philippines, Romania, the Russian Federation, Sin- of the Plan of Action and to track global progress gapore and Thailand. Some of the results are pre- in the use of ICTs. International cooperation is sented in annex I. The tables feature the results of necessary for the setting up of coherent and inter- only a limited number of countries and few indica- nationally comparable indicator systems, taking tors, and thus provide neither a comprehensive into account different levels of development. Bet- overview nor comparable data on the use of ICTs in ter data on ICT readiness, use and impact are enterprises. However, they demonstrate that devel- needed in order to design, implement and evaluate oping countries are increasingly becoming aware of ICT development policies. the importance of collecting ICT indicators and statistics for policy-making, and for monitoring and Currently, there is no international database that benchmarking their information society develop- provides information on the use of ICTs in enter- ments. prises in developing countries. The Organisation for Economic Cooperation and Development Of course, any efforts such as those discussed (OECD) and Eurostat have been compiling infor- above, undertaken at the international or national mation for their respective member countries for levels to ascertain the extent to which, and the a couple of years, following the collection of such ways in which, ICTs are affecting economic and data by national statistical offices. social development, are justified only insofar as they provide inputs for ICT-for-development pol- Although some developing countries have started icy-making. Although this is an area in which the to collect ICT indicators through their official sta- evolution of technology is a powerful factor of tistical systems, the data are not always comparable change that to some extent at least remains a given across countries, or with those of developed coun- for developing countries, the choices that individu- tries. This calls for collective action at the interna- als and societies make have an equally important tional level to coordinate the methodological work role in determining outcomes in terms of the and to work towards a global database on ICT indi- impact of ICTs on development. The second part cators. The UNCTAD secretariat has thus of this chapter looks briefly at some of the policy launched a new data collection exercise to compile issues with an international dimension that devel- e-business statistics from developing countries and oping countries and the international community make them available in its annual E-Commerce and in general should pay attention to in the coming Development Report. This is part of a global initia- months, particularly in the run-up to the second tive among international and regional organiza- phase of the WSIS.

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 1: ICT, FOR ECONOMIC DEVELOPMENT: ISSUES FOR INTERNATIONAL DIALOGUE 15

B. The dialogue about ICT-for- It may be true that there are not many examples development: Some suggestions of significant direct damage to developing-country economic interests caused by the operation of such systems as they stand today (a partial possible 1. The question of Internet governance explanation being that most developing countries have so far had a shorter and narrower exposure Given the profound impact of the Internet on to the Internet). However, in order to be effective multiple aspects of society, the debate about its in the long term, governance mechanisms must future evolution and the role that different social rely on their acceptance by the governed. Techni- players should have in deciding the direction it cal effectiveness alone does not necessarily provide will take is bound to be an intense one. In such a legitimacy. While the very success of the Internet debate, the technological implications of the issues would point to the existence of a fundamental involved are likely to be interpreted, to some consensus among the original Internet commu- extent at least, in the light of the real or perceived nity, such consensus is rapidly eroding. It is only a conflicts of interests – political, economic and cul- matter of time before a system lacking political tural – regarding the development of what has support becomes a technically dysfunctional one. become a global resource. It is also important to keep in mind that the past is not always a reliable guide to the future and that Even though there is no agreement among the par- changes in both the demand and the supply side of ticipants in the debate about the exact delimitation the market for Internet services may well render of the processes that the term “Internet govern- obsolete the arrangements that were so useful dur- ance” designates, the discussions throughout the ing the earlier phases of the emergence of the WSIS process made it clear that a majority of Internet. developing countries feel that the status quo does not serve their interests well and needs to be The concerns of developing countries reformed. The establishment of some sort of intergovernmental mechanism has been proposed. The weaknesses of some of the governance struc- Furthermore, the lack of satisfaction with current tures of core aspects of the Internet are not merely arrangements is not limited to the Governments a matter of principle or perception. The domi- of developing countries, although the analysis of nance by one or a few countries of core Internet what is not working and the solutions proposed resources can generate concerns about the poten- may differ significantly among critics. tial for discriminatory treatment of other countries. For instance, it has been pointed out that From another viewpoint, the rapid expansion of some universities in the developed world hold the Internet across the world, which is probably more Internet Protocol (IP) addresses than many faster than that of previous technological revolu- developing countries (and earn money renting tions, and the phenomenal growth of its commer- them out). Legal mechanisms based on the cial applications would support the view that the enforcement of private contracts (to be carried out structures that underpin the development of the essentially by the national courts of one country) Internet serve their purpose well. According to are not necessarily the optimal way to settle inter- this viewpoint, given the evolutionary nature of national public policy issues. As the Internet pene- such structures and the extent to which they rely trates almost every aspect of social life, Govern- on coordination and cooperation among the mem- ments are justified in seeing it as a type of vital bers of the Internet community, the safest means international public utility, which cannot be man- to ensure the balanced growth of the Internet is to aged without regard to internationally accepted allow the evolutionary process to move on freely, principles such as the sovereign equality of States. avoiding as much as possible control that goes beyond monitoring and minimizing governmental Also, measures intended to achieve desirable aims, involvement. From this viewpoint, some of the such as the empowerment of private players and objections to the policy-making and coordination the reduction of undue governmental control, can arrangements of the DNS and the root server sys- go too far and result in the extension of neo-cor- tem may concern more the processes through poratist approaches and the predominance of spe- which these governance mechanisms operate than cial interest groups that may seriously undermine their outcome. transparency, openness and the democratic

E-COMMERCE AND DEVELOPMENT REPORT 2004 16 CHAPTER 1: ICT FOR ECONOMIC DEVELOPMENT: ISSUES FOR INTERNATIONAL DIALOGUE process. Since the Internet plays a growing role in physical and logical infrastructure of the Internet, the implementation of national development strat- and would probably be more appropriately egies, Governments as the only players in the referred to as the management of the core development process that enjoy full democratic resources of the Internet) and “governance on the legitimacy have a clear interest in ensuring that Internet” (which concerns the activities that take the Internet evolves in a direction that is compati- place over the Internet, particularly the exchange ble with their development strategies and the proof information, goods and services). tection of the public interest, for which – unlike any other actors – they are accountable to their Of course, it is not possible to establish a clear-cut populations. Unless globally endorsed responses separation between all infrastructural/technologi- are provided to these questions, societies that feel cal matters on one hand and political and socio- that their political, economic or cultural interests economic questions on the other. Policy decisions are not considered or are even at risk might very often have technological implications, and develop their own individual responses, thus jeop- vice versa. A crude device to categorize the public ardizing the greatest potential of the Internet as a policy issues that need to be addressed and the tool for development, namely its universal reach. responses that could be explored in each case could be to distinguish between the management The first step that needs to be taken in order to of the Internet as a global utility and the interna- move the discussion forward is to ensure that all tional governance issues posed by the use that peo- participants share some fundamental understand- ple make of that utility. ing of the nature of the arrangements being discussed, and of the interests at stake. In this regard, Concerning the group of issues that could fall into it is important that the position of the proponents the “governance on the Internet” category, the of change be articulated beyond matters of princi- most commonly quoted include matters such as ple and process, so that a discussion can be started content regulation, intellectual property (although in terms of specific interests, problems and impact these are also affected by the operation of the on the ground, and a practical work programme. Internet Corporation for Assigned Names and The fundamental interest of developing countries Numbers (ICANN)), jurisdiction, competition is to ensure that their specific needs and concerns policy (particularly in connection with the ques- are taken into consideration in any decision-mak- tion of Internet interconnection costs and the ing that will affect the evolution of the Internet imbalances in the relationship between tier 1 back- and in particular its application to development bone operators and developing country Internet problems, including those that may impact on the service providers (ISP) and smaller backbone oper- supply capacity and the competitiveness of their ators), e-commerce taxation, consumer protection, economies. security and spam. For most of these examples, international governance instruments already exist or could easily be devised. For example, the Governance “of” the Internet versus govern- United Nations Commission on International ance “on” the Internet Trade Law (UNCITRAL) and the Hague Confer- ence on Private International Law provide forums Once it is recognized that a political answer to that are suitable for addressing legal issues raised these questions needs to be found, it is also neces- by the conducting of commercial or private trans- sary to admit that there are not many examples of actions on the Internet. In other cases, efforts have concrete policy areas in which responses require already been undertaken at the regional level (for the development of new Internet-specific interna- example, the Convention on Cybercrime of the tional institutions, especially from the viewpoint Council of Europe), and if they are built on, a glo- of economic competitiveness. In fact, if there is bal international framework could be devised the political will to tackle the issues, existing sys- without major conceptual difficulties. In other tems of international coordination, cooperation cases, the nature of the problems is such that the or rule-making appear to be sufficient to deal with optimal solution may involve a mixture of inter- many if not most of the governance problems national law-enforcement cooperation and end- posed by the development of the Internet. In this user awareness and action (for example, with regard, a distinction has been suggested between regard to spam). In all these cases, the substantive “governance of the Internet” (that involves the character of the issue in question, rather than the

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 1: ICT, FOR ECONOMIC DEVELOPMENT: ISSUES FOR INTERNATIONAL DIALOGUE 17 fact that the Internet is the medium through the limited influence of Governments in ICANN which the problematic activity is conducted, and in particular with the purely advisory role of should be the determinant criterion as to what the Governmental Advisory Committee (GAC), level of “governance” (from consensus building must be recognized and addressed. In this regard, and cooperation to rule-making) and what instru- reaching a common definition of the interests of ments should be applied. the international community that must be served by the system of Internet governance, and agree- The problem of the imbalances in the distribution ment about the way in which Governments of the cost of international Internet interconnec- should be involved in it, is probably the most tion systems exemplifies the situations in which important aspect of the work to be done before existing frameworks may not be fully satisfactory, the second phase of WSIS. Although at this stage while the creation of specific Internet-focused gov- of the discussion it is too early to make concrete ernance instruments may not be a better option. institutional proposals, some of the features that The case for intervention in this area rests on the they should have can be distinguished. possible existence of restrictive business practices (RBP) by large backbone operators, resulting in unfairly high costs for developing country ISP and First, it must be recognized that whatever the developing country Internet users, which thus merits of the case for their reform, the loose con- aggravate the international digital divide. The stellation of organizations that have so far under- problem being essentially one of international pinned the development of the Internet have competition policy, its treatment presents well- achieved remarkable success in ensuring the stabil- known difficulties, particularly when it is develop- ity and unity of a highly decentralized network of ing countries that suffer the effects of the RBP and networks, with no centre and no strong rule-mak- therefore stand little chance of benefiting from the ing authority. For any reform proposal to be via- activity of the competition authorities of the ble, not just technically but also politically, it major players. In any event, an improvement in must provide strong evidence that it will ensure this situation is more likely to result from meas- the continued stability and quality of service of ures that address the general trade and develop- the Internet, prevent its fragmentation and main- ment issues connected with competition policy in tain the “bottom-up” processes through which a manner that is consistent with the interests of standards and policies have been developed so far. developing countries than from the establishment of a comprehensive Internet regulatory system. Second, no one-size-fits-all solution is likely to The issue in the case of this example is therefore emerge. In addition to the management of core not so much the need for a new intergovernmen- resources (IP addresses, DNS, root servers, proto- tal organization to deal with the issues raised by cols), a number of questions in which technologi- the Internet as the inadequacy of some aspects of cal and policy issues are particularly intertwined the multilateral trade framework for dealing with are likely to be best treated within an network of the concerns of developing countries. international frameworks (as opposed to a unified, structured organization) of cooperation and coor- Reform, stability and performance dination for the development of the Internet. These include, for example, the regulation of the The management of the DNS that is performed by Whois database (in connection in particular with ICANN and the operation of the root server sys- privacy protection concerns), security (from the tem that is in the hands of a small group of public viewpoint of the network and from the viewpoint and private sector entities are at the core of the of the user, which may sometimes enter into con- “governance of the Internet” in the narrow sense. flict), the dispute resolution system and the prob- Equally important are a number of mainly mem- lem of multilingualism. In such a cooperative bership-based organizations that support the framework, flexibility should be a paramount con- development of many of the standards and poli- sideration. For instance, not all stakeholders need cies that provide the “logical” infrastructure of the to play an equally relevant role in addressing Internet. Setting out their strengths and weak- every matter, and some problems may require nesses, and in particular those of ICANN, is hard-and-fast rules and formal structures while beyond the scope of this section; but the fact that others may not. Structural flexibility and lightness many developing countries are not at ease with are also needed in order to prevent governance

E-COMMERCE AND DEVELOPMENT REPORT 2004 18 CHAPTER 1: ICT FOR ECONOMIC DEVELOPMENT: ISSUES FOR INTERNATIONAL DIALOGUE solutions from being rendered obsolete by techno- 2. ICTs and economic development in logical evolution. the run-up to the next phase of the WSIS Third, evolution is more likely to produce results than a voluntarist top-down approach. The cur- The Plan of Action adopted at the WSIS in rent system of management of core Internet December 2003 includes a comprehensive list of resources is the result of a process that has taken “action lines” to be carried out by Governments, place over a remarkably short time. It is clear that the international community, the business sector this evolution has not yet reached a stage of matu- and civil society. All aspects of the information rity that is acceptable to all its stakeholders. Also, society, ranging from economic, legal, health and education matters to media, culture and the envi- it must complete a process of genuine internation- 13 alization (which is not necessarily equivalent to ronment are addressed by the Plan of Action. As the focal point in the UN system for the inte- full-fledged intergovernmentalization, but implies grated treatment of trade and development and representativeness requirements beyond the par- the interrelated issues of finance, technology ticipation of individuals/organizations of various investment and sustainable development, nationalities). In the completion of that process it UNCTAD is involved in the dialogue concerning is essential to reconcile demands for change with those matters in the WSIS Plan of Action that the need to ensure the continued delivery of the have a trade and development dimension. Thus, critical services that ICANN and the root server at its eleventh session, held in São Paulo in June system provide to the Internet community. If, as 2004, a discussion took place concerning the trade argued above, technical effectiveness alone does and development aspects of the Plan of Action not confer legitimacy, ineffectiveness can ruin it. that should be acted upon before the next phase of the WSIS in November 2005.14 On the basis of the outcome of that discussion, the next paragraphs Supporting the dialogue will make a few suggestions about the ways in which the WSIS process could contribute to the The evolution of the governance framework progress of the economic dimension of the infor- towards a system that is more development- mation society. friendly would be facilitated if developing country players (both governmental and non-governmen- The Plan of Action emphasizes the role of national e-strategies as key instruments for the tal) would identify concrete policy issues (as advancement of the information society in devel- opposed to broad policy areas) in which their con- oping countries. It also calls for action to promote cerns and interests are not being considered ade- development-oriented ICT applications for all, in quately. Developing countries need to assess the particular the use of ICTs by small and medium- implications of different Internet governance sized enterprises (SMEs) to foster innovation, models, including in terms of their impact on the achieve gains in productivity, reduce transaction capacity of their economies to benefit from the costs and combat poverty. Underlying this call for adoption of e-commerce and e-business practices. action is the assumption (supported by a growing This is an undertaking to which UNCTAD could amount of evidence) that the increased diffusion contribute within the limits of its mandate in the of ICTs makes a positive contribution to eco- trade and development area. nomic growth and development. The treatment of these issues in the WSIS context should contribute to the emergence of a consensus about the A sustained capacity-building effort of for Internet national policies under which, and the interna- policy-making is needed so that the majority of tional environment in which, a higher degree of the developing countries can effectively partici- ICT take-up and use can result in faster, more pate in the management/governance systems that equitable economic growth. may emerge from the WSIS process. This is another area in which UNCTAD can make a con- ICTs can open up new opportunities for develop- tribution within an international framework in ing countries’ exports of goods and services. The which the United Nations ICT Task Force could available data show that international trade in ICT play an important coordination role. goods and services has grown in recent years at a

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 1: ICT, FOR ECONOMIC DEVELOPMENT: ISSUES FOR INTERNATIONAL DIALOGUE 19 faster rate than total international trade and that it in ICT policy formulation. Such participatory remains robust. Reductions in transaction and approach should aim at making compatible the information-gathering costs make it easier for desired effects of ICTs on productivity and com- developing-country enterprises to broaden their petitiveness with the attainment of social goals in customer base and to participate in international terms of equity and integration. supply chains. The possibility of delivering services online rather than through a physical pres- In brief, in order to go further in its treatment of ence allows developing countries to benefit from the economic aspects of the information society, their comparative advantage in some ICT-enabled the second phase of the WSIS could explore labour-intensive services. Thus, those countries answers to questions such as the following: are gaining a world market share in the export of computer-related services, communication serv- • What effects, positive or negative, are ices and financial services. However, in order to ICTs having on the economic prospects extend the reach of the positive effects of ICTs on of developing countries? What lessons the economic growth of the majority of develop- from available experience can be applied ing countries an enabling environment for ICTs to ICT policy-making in the areas that needs to be created at the national and interna- affect trade, enterprise development or tional levels. employment? • What strategies have proved successful in At the national level, the promotion and the terms of enabling enterprises (especially facilitation of the adoption of ICTs by the SMEs SMEs) to become more competitive are likely to play a major role in this regard. through the use of ICTs? Among the particular challenges that SMEs face in the use of ICTs for business development, • How can ICTs be used to facilitate the aspects such as awareness, skill-building, access to participation of the SMEs of developing finance for investment in ICTs and the possibil- countries in national and international ity of using online payment facilities need partic- supply chains? ular attention • What effects will ICT-induced changes, at the level of the firm and of the whole Changes are necessary in productive processes at economy, have on labour markets? What the firm level, where the full effects of ICTs in policies may facilitate equitable outcomes terms of productivity and hence competitiveness for these processes? often cannot materialize unless their adoption comes together with structural transformation. These and other questions are to be addressed at a Such changes may impose costs on workers and thematic meeting on the economic and social should therefore be facilitated through mechanisms implications of ICTs as part of the WSIS II pre- that ensure an equitable distribution of the costs paratory process that will be held in the first half and that help workers and firms to adjust to the of 2005. The outcome of this event is intended to new environment. ICT-for-development policies provide the WSIS with suggestions on policies and should include measures to help people face the programmes that can help countries to utilize cost of adjustment to the widespread use of ICTs. ICTs for effective poverty eradication through the growth of economically sustainable enterprises. To maximize the positive impact of ICTs on economic performance, the adoption of the technol- In order to achieve this, sound analysis will be ogy must be supported by previous cultural needed concerning how SMEs in developing coun- change throughout the economy, and especially tries are actually using ICTs, what benefits they among the managerial levels of the enterprises. obtain from them and at what costs, and how gov- Such cultural change is necessary in order to ernment policies can enhance the effectiveness of implement the structural transformation without their investments in ICTs. Chapter 2 of this which ICT investments will not bear all their Report provides some answers to these and other fruits. Because these transformations can be pro- questions as a contribution to a debate that should found, rapid and costly for some of the people reach at the Tunis Summit some conclusions that affected it is important to involve all social players can be translated into reality.

E-COMMERCE AND DEVELOPMENT REPORT 2004 20 CHAPTER 1: ICT FOR ECONOMIC DEVELOPMENT: ISSUES FOR INTERNATIONAL DIALOGUE

Annex I

ICT usage in enterprises in selected countries

Table 1.11 ICT usage in enterprises, 2002 or latest available year (percentage)

Indicator Argentina1,3 Chile Colombia1,3 Morocco Peru3 Philippines3 Romania Russian Singapore Thailand Federation

Proportion of .. 62.7 76.6 .. 80.0 87.8 16.1 81.1 83.3 67.7 businesses with PCs Proportion of employees .. .. 19.7 ...... 11.6 27.5 .. .. using PCs Proportion of businesses with an 35.6 .. 14.4 7.0 25.4 22.0 .. 41.6 32.1 .. intranet Proportion of businesses with an 11.0 .. 9.7 .. 19.8 7.5 .. 7.2 15.6 .. extranet Proportion of businesses with Internet 86.9 46.9 53.7 42.0 64.2 62.4 7.5 37.7 78.3 38.3 access Proportion of employees .. 10.3 9.0 .. 25.4 .. 5.9 6.4 .. .. using the Internet Proportion of businesses with a 56.5 12.6 25.7 11.0 22.6 .. 2.0 11.6 .. 14.3 website2 Proportion of businesses receiving 14.6 .. 6.5 .. .. 1.9 0.5 9.0 .. 9.9 orders over the Internet (i.e. Internet sales) Proportion of businesses placing ...... 8.0 .. 2.5 0.4 10.1 .. .. orders over the Internet (i.e. Internet purchases)

Source: National Statistical Offices. Note: Microenterprises excluded 1 Manufacturing sector only 2 Colombia: of enterprises with Internet access 3 Data for 2001.

Chart 1.5 Chart 1.4 Proportion of businesses with a website Proportion of businesses with (% of those with internet access) internet access (%) Colombia, 2001 Colombia, 2001

Source: National Statistical Office. Source: National Statistical Office.

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 1: ICT, FOR ECONOMIC DEVELOPMENT: ISSUES FOR INTERNATIONAL DIALOGUE 21

Chart 1.6

ICT usage by size of enterprises: Russian Federation, 2002

Source: National Statistical Office.

Chart 1.7

ICT usage by of enterprises (%): Russian Federation, 2001–2002

Source: National Statistical Office.

E-COMMERCE AND DEVELOPMENT REPORT 2004 22 CHAPTER 1: ICT FOR ECONOMIC DEVELOPMENT: ISSUES FOR INTERNATIONAL DIALOGUE

Chart 1.8

ICT usage by enterprises (%): Thailand, 2002–2003

Source: National Statistical Office.

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 1: ICT, FOR ECONOMIC DEVELOPMENT: ISSUES FOR INTERNATIONAL DIALOGUE 23

References

Eurostat (2004). E-commerce and the Internet in European Businesses (2002). Detailed tables. Brussels. Available at europa.eu.int/comm/enterprise/ict/studies/entr-ict-2002.pdf.

International Telecommunication Union (ITU) (2003). World Telecommunication Development Report: Access Indica- tors for the Information Society. Geneva. Information concerning the Digital Access Index is available at www.itu.int/ITU-D/ict/dai/index.html.

International Telecommunication Union (ITU) (2004). Internet indicators: Hosts, users and numbers of PCs, 2003, 2002 and 2001. www.itu.int/ITU-D/ict/statistics, as consulted on 30 June 2003

Internet Systems Consortium (2004). Internet Domain Survey. January 2004. Available at ww.isc.org.

Netcraft.com (2004a). SSL Survey April 2004. Summary of results available at www.netcraft.com

Netcraft.com (2004b). Web Server Survey June 2004. Summary of results available at www.netcraft.com.

Orbicom (2003). Monitoring the Digital Divide and Beyond. Montreal. Available at www.orbicom.uqam.ca.

United States Census Bureau (2004a). 2002 E-Commerce Multisector Report. 15 April 2004. Available at www.census.gov/eos/www/ebusiness614.htm

United States Census Bureau (2004b). Retail 1Q, 2004 E-Commerce Report. 21 May 2004. Available at www.census.gov/eos/www/ebusiness614.htm.

World Summit on the Information Society (2003). Plan of Action. Document WSIS-03/Geneva/DOC/5-E. 12 December 2003. Available in all UN official languages at www.itu.int/wsis/documents/doc_multi-en- 1161|1160.asp.

E-COMMERCE AND DEVELOPMENT REPORT 2004 24 CHAPTER 1: ICT FOR ECONOMIC DEVELOPMENT: ISSUES FOR INTERNATIONAL DIALOGUE

Notes

11. See paragraph 62 of the São Paulo Consensus, TD/410 25, June 2004, adopted by UNCTAD XI, São Paulo 13– 18 June 2004.

12. See ITU (2004).

13. See http://www.isc.org/ for details about the methodology of the survey.

14. It is also possible for the same computer to operate several virtual hosts, not all of which, theoretically at least, need to use the same TLD.

15. See Netcraft.com (2004b).

16. See Netcraft.com (2004b).

17. See ITU

18. Market size considerations are relevant in this context, as smaller markets may, among other things, be unable to support local-language versions of commercial software. Free and open-source software solutions may play a useful role in this regard.

19. See Orbicom (2003)

10. See United States Census Bureau (2004b)

11. See United States Census Bureau (2004a)

12. See Eurostat (2004).

13. See World Summit on the Information Society (2003).

14. See www.unctadxi.org/templates/Event____69.aspx for the full report and documentation of the thematic session of UNCTAD XI that dealt with ICTs as enablers for growth, development and competitiveness.

E-COMMERCE AND DEVELOPMENT REPORT 2004 Chapter 2 E-BUSINESS AND SMEs

often not be afforded. At the same time, the com- A. Introduction mercial benefits resulting from such changes are not always obvious to small business owners, and in With the continuous spread of the Internet and its some cases firms may choose to adopt ICTs as a related applications, the adoption of information result of external forces and the need to remain com- and communication technologies (ICTs) by enter- petitive rather than direct increases in productivity. prises and firms is also growing. New e-business practices are more and more integrated into exist- This chapter will focus on the adoption of ICTs ing business processes, especially those of large by SMEs in three developing country regions firms in developed countries. Firms use ICTs for (Asia, Africa and Latin America). It will investi- internal automation, for example of office and gate which companies use ICTs according to sec- production processes, for customer relations and tor, size, location or target markets (foreign or supply chain management, or for the management domestic); the costs and benefits of using ICTs of distribution and logistics networks. Internet use from the viewpoint of SMEs; the specific circum- may range from simple website presence to the stances faced by SMEs which may impact on ICT complete integration of business functions. usage, such as access, quality, costs, skills or finance; and what kind of assistance they may As a result, e-business practices are increasingly need to enhance their e-business activities. becoming the subject of studies evaluating the impact of ICTs on economic growth and business Most of the existing knowledge about the use of performance, including in previous editions of the ICTs in enterprises or e-business, and its impact E-Commerce and Development Report. Unfortu- on business performance in the developing world, nately, most of the available data and studies focus is based on anecdotal and case study evidence, on developed countries’ firms, whereas little is whereas little statistical data on e-business are known about the adoption of the Internet and e- available. This chapter sets out to review the business in developing country firms, particularly results of e-business survey data from selected small and medium-sized enterprises (SMEs). Asian and African countries. It then presents and discusses the results of a survey on ICT usage by At the same time, global developments and com- SMEs in five Latin American countries. The sur- petitive forces are increasingly driving firms in all vey included questions related to access to and use countries towards adopting new ICT-based strate- of ICT and the Internet, the impact of and barriers gies and business practices. For example, the inter- to using ICT and perceived solutions that could action with (foreign) suppliers and clients has address these constraints. already led most firms in developing countries to connect to the Internet for e-mail purposes. The next section looks at the potential and current Although e-mailing is only the first step towards adoption of ICTs by enterprises, using available the adoption of ICTs, it is an important one; sub- data mainly from developed countries, and dis- sequently, firms usually set up their own website cusses the case of SMEs. Section C assesses the use and start to use the Internet for information of e-business by SMEs in developing Asian and searches and marketing of their products and African countries on the basis of case studies and services. available country surveys. Section D presents the survey carried out among SMEs in Latin America, Moving from simply connecting to the Internet and discusses its main results. Section E draws towards integrating ICTs in business applications is some conclusions and makes policy recommenda- a major step for SMEs in developing countries and tions on the basis of findings from the Latin Amer- requires management and technical skills, as well as ican survey and from studies carried out in other organizational changes and investments that can regions.

25 26 CHAPTER 2: E-BUSINESS AND SMEs

B. Using ICTs in enterprises results, we now know that the amount of e-commerce conducted is much less than anticipated a During the late 1990s, much attention was paid to few years earlier and that – even in the most the emergence of e-commerce, or the move advanced countries – online purchases and sales towards online purchases and sales. The figures for account for only a small, albeit growing, share of global business-to-business (B2B) e-commerce total transactions. soared, with estimates ranging between $200 and 600 billion for the year 2000, and predicted to However, the use of ICTs and the Internet in reach $12 trillion by 2006 (UNCTAD, 2001; For- enterprises is not confined to e-commerce, or rester, 2001). These estimates were largely pro- ordering and selling online. More attention needs duced by private data providers, who based their to be paid to “where” firms are actually using the calculations on their own surveys and methodolo- technologies within the firm, in their regular busi- gies. As a result, the data from one source were ness activities. In fact, and this is where ICTs will usually not comparable with those from another. have their most profound impact on business structures, they are increasingly incorporated into Recognizing the need for more reliable and inter- business activities such as customer acquisition nationally comparable data and indicators, since and retention, finance and account management, the beginning of the millennium an increasing product service and support, or logistics and number of (mainly advanced) countries have inventory control. By automating some of these started to collect ICT-related statistics – including functions, companies integrate internal tasks and e-commerce – on a regular basis, through their systems as well as their relations with suppliers official national statistical systems.1 From their and customers and their applications (box 2.1).

Box 2.1 E-business processes

Customer acquisition and retention Customer relationship management (CRM); marketing campaign management, planning and execution; database marketing, direct marketing, telemarketing; electronic catalogue; Web activity analysis, Web advertising; call centres; arranging repairs and maintenance; handling customer complaints E-commerce Sale or purchase/procurement of goods or services (includes getting estimates, negotiating, ordering, arranging contracts); EDI; mobile commerce; integration of ordering system with that of customer/supplier; integrated invoicing and payment of customers; full integration with back-end system; use of extranet; secure transactions; automated payment of suppliers Order fulfilment and order tracking Order control, product control, order tracking; data processing that relates to order fulfilment or tracking; sales force automation Logistics (inbound & outbound) and inventory control Supply chain management (SCM); production and inventory control (including of raw materials, parts, finished goods), distribution control, management of inventory, management of customers’ inventory, transportation and shipping, automated warehouse; arranging and managing transport, dispatch of goods, tracking, provision of services Finance, budget and account management Enterprise resource planning (ERP); managing, planning and evaluating finance; invoicing and payment systems; software systems (e.g. SAP) Human resource management External and internal recruitment, online job applications; automating of administrative tasks such as time reporting, payment of salaries and pension schemes, travel reimbursement, tracking working hours and production time; training; teleworking Product service and support Website support, frequently asked questions (FAQ), downloadable manuals, online queries; after-sales support Research and development Research, development and design of products, services or processes; computer-aided design (CAD), computer-aided manufacturing (CAM) and collaborative design; Knowledge management Systematically aggregating and disseminating information and knowledge within the company; content management system; e-learning

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 2: E-BUSINESS AND SMEs 27

For example, upon receipt of an online order, • Companies use the Internet mainly for mar- product availability is automatically checked, keting purposes, while e-commerce still accounting and logistics are notified, and new sup- accounts for a small – albeit growing – pro- plies are ordered. By merging functions such as portion of overall sales: 0.4 to 1.8 per cent of order processing, payments and after-sales serv- total sales in 2000, with the highest figure in ices, firms are able to reduce operational costs and Sweden (13 per cent). Sales using electronic provide better services. Some of the functions are data interchange (EDI) are higher than those internally linked, through the companies’ compu- via the Internet, and purchasing is more ter systems, and some are linked or integrated common than selling (about twice as high). with other companies’ systems (those of suppliers On the other hand, almost one third of or customers). companies with Internet access in the EU purchased at least some of their products The use of the Internet improves customer rela- online in 2001 (ranging from 8 per cent in tionship management (CRM) and allows firms to Spain to 62 per cent in Sweden). customize their services. Customized customer care allows companies to respond to customers in • Internet sales are mainly domestic or at the real time, thus improving customer confidence; regional level, for example within Europe. moreover, customer preferences can be monitored E-commerce is greater in services than in and more targeted marketing strategies developed. manufacturing, and it features particularly in financial services, business services and Through computer networks business processes wholesale trade. Only a few companies such as ordering, transacting, fulfilment and deliv- deliver their goods and services online, and ery, inventory control and accounting can be few offer online payment facilities. streamlined and connected regardless of location. They can create value by offering enhanced order • Business-to-consumer (B2C) e-commerce features, such as order status verification and back still accounts for only a small share of e- order information. Intra-firm and inter-firm com- commerce, but is growing. It is highest in puter networks allow companies to outsource cer- Denmark, Sweden, the United Kingdom tain activities, and to integrate activities through- and the United States and covers mainly out the value chain. They also improve supply computer-related products, clothing and chain management (SCM) using a just-in-time digitized products. In some countries, retail approach. transactions are used as proxies for measuring B2C electronic transactions. The results In summary, ICTs and the Internet can play a sub- show that they account for a small propor- stantial role in implementing companies' major tion of total sales, with the highest figures in strategies for growth, such as increasing strategic the United States (with 1.9 per cent of total marketing/promotional efforts, customer rela- retail sales online in 2004; see chapter 1).2 tions or the quality of products and services. Despite the low value of its transactions, B2C e-commerce has received most attention, partly because issues such as consumer 1. Evidence from developed countries trust and data protection have received considerable attention from policy makers. Since a number of statistical offices in developed countries have started to collect ICT usage data • Internet access usually increases with the through business surveys during the past few size of companies, but in some countries years, there is now a much better understanding (e.g. Denmark) even 85 per cent of microen- of the use and impact of ICTs on enterprises. terprises (with 5 to 9 employees) use the Studies by the OECD (2002) and Eurostat (2004) Internet. ICT usage depends on the nature provide the following evidence, based on official of the business – it is more appropriate for data sources. some activities than for others. The Internet is more prevalent in certain sectors than in • In 2003, on average 87 per cent of others. These include finance and insurance, enterprises in the European Union (EU) business services and wholesale trade, had an Internet connection (up from 80 whereas retail trade has the lowest Internet per cent in 2002). penetration rates.

E-COMMERCE AND DEVELOPMENT REPORT 2004 28 CHAPTER 2: E-BUSINESS AND SMEs

• Available data also show that countries with matically lead to an increase in e-business prac- lower access costs have a higher take-up of tices, and is therefore not the main constraint on the Internet. The highest rate of ICT diffu- (or main enabler of) the adoption of e-business. sion among OECD countries can be found in the United States, Canada, New Zealand, There is also now a growing amount of evidence Australia, the Nordic countries and the concerning the impact of ICTs on business per- Netherlands. And the cost of hardware and formance. During the past few years, a number of software is important for determining the firm-level studies have shown the positive impact level of investment. of ICT use on firm performance, in particular on labour productivity (UNCTAD, 2003a). • Key problems in Europe, defined as perceived barriers to Internet use by compa- In a comprehensive cross-country study, an nies, include the lack of network security, OECD-led consortium of researchers looked at slow or unstable communications, and legal the impact of ICT at the firm level, on the basis of uncertainties (concerning payments, con- official data sources for the use of ICT in enter- tracts and deliveries). On the other hand, prises from 13 OECD countries (OECD 2003, costs related to access to and use of the 2004a). They found a positive impact of ICT use Internet are not perceived as major barriers. on productivity in all of the country studies, with somewhat more significant results in the services As one of the pioneers in the collection of e-busi- sectors. For example, in Australia, firm-level ness statistics, the UK in its 2002 e-commerce sur- econometric analysis revealed a positive link vey included a number of questions on e-business between ICT usage and productivity growth in all processes (as set out in box 2.1). Generally speak- sectors studied. The productivity growth effect of ing, responses showed that while about half of the using one particular technology, however, is great- large companies are using e-business-related sys- est in the earlier years and seems to taper off over tems, only 20 per cent of medium-sized firms (50 to time (OECD, 2004a). In the United Kingdom, 249 employees) and 8 per cent of small firms (10 to buying online has been shown to have a greater 49 employees) are doing so. Most common func- impact on firms' output growth than selling tions were integrated invoicing or payment sys- online, a fact which is explained by pricing effects tems, integrated production or service operating and price transparency related to e-procurement, systems, and integrated logistics or delivery sys- which allows companies to secure more competi- tems. The survey also found that firms that had tive deals. Online suppliers, on the other hand, linked one process to selling or purchasing often may suffer from the negative impact on prices had linked at least three. This suggests that as firms related to e-marketing and online selling of goods. start to integrate business processes, they do so for a number of activities. As regards the integration of The studies conclude that ICT usage contributes companies' systems with those of suppliers and cus- to enhanced business performance provided that it tomers, a higher number of firms reported that is complemented by other investments (e.g. in they had linked with suppliers rather than with cus- skills) and organizational changes. Organizational tomers. But overall, less than 10 per cent of SMEs changes that enhance the benefits of ICTs include had their systems integrated with those of others new strategies, new business practices and proc- (Goodridge and Clayton, 2004). esses, and new organizational structures.

The Scottish e-business survey, carried out annu- The studies also show that companies which are ally, revealed that dynamic (or fast-growing) com- poorly managed and lack skills and innovation do panies are more likely to adopt e-business technol- not benefit from ICT usage. In other words, sim- ogies or broadband. By contrast, companies that ply using ICTs does not automatically lead to have not yet adopted e-business say that they do increased returns on investments if other condi- not see the value to their business or do not have tions are not in place. Hence, an important con- the right skills to do so (Scottish Enterprise, 2003). clusion is that the economic impact of ICTs may The survey also found that the adoption of e-busi- be limited if no other investments or changes are ness increases with size, and changes from sector being introduced at the same time. The studies to sector, with a higher rate of adoption in services also conclude that the benefits of investment in than in manufacturing (except for the use of web- ICTs are not felt immediately, and that it takes sites). The adoption of broadband does not auto- time before returns on investment materialize.

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 2: E-BUSINESS AND SMEs 29

2. The case of SMEs the Eurostat survey also revealed that those SMEs that have decided to engage in e-commerce are Much of the evidence provided above does not more intensive users than their larger counter- specifically address the case of SMEs. One prob- parts. International competition will drive firms lem related to capturing SME adoption of ICT (or to use ICTs or implement B2B e-commerce. Fur- any other behaviour, for that matter) is related to thermore, use of ICTs increases over time, as the problem of size definition, which varies from firms move to more complex forms of e-business. country to country. Therefore, cross-country This holds for companies of all sizes. comparisons of SME surveys always have to take into consideration the size definition. At the same time, a Canadian study found that SMEs, while generally lagging behind in Internet The studies carried out in some of the OECD uptake, have the greatest potential for productiv- countries revealed that the adoption of ICTs ity gains through e-business (CeBI, 2002). On the increases with size, especially the use of network basis of a survey with around 2000 SMEs, they technologies such as intranets, whereas most com- found that firms were able to increase revenues by panies are connected to the Internet (charts 2.1 7 per cent, and decrease costs by 9.5 per cent (costs and 2.2). For example, in Europe, 79 per cent of of goods sold) and 7.5 per cent (sales and adminis- large companies had an intranet in 2001, com- trative costs). Hence, companies run the risk of pared with only 25 per cent of small companies missing opportunities for business growth by not (Eurostat, 2004). Small firms use the Internet adopting e-business solutions. mainly for marketing purposes and to search for information concerning potential customers, sup- Results from e-business surveys of Irish SMEs pliers and competitors, but also for e-banking and revealed that the number of firms connected to the other types of financial services (in fact, the latter Internet has levelled off at 84 per cent (2002), a 3 activity is more common in small than large enter- per cent increase only over the figure for 2001 prises in Europe). As far as e-commerce is con- (Chambers of Commerce of Ireland, 2002). How- cerned, smaller companies are less active: in partic- ever, an increasing number of SMEs have their ular, they buy less online than larger firms and own websites (55 per cent, an increase of 9 per cent their shares of Internet sales (of total sales) are over 2001) and are using the Internet for online much smaller (OECD, 2004b). But almost one ordering (46 per cent of SMEs) and e-banking (55 third of European SMEs that use the Internet have per cent, or 21 per cent more than in 2001). Thirty- received online orders (chart 2.3). Interestingly, three per cent of SMEs had an intranet and 17 per

Chart 2.1 Internet usage by size of enterprise, 2003 (percentages)

Source: Eurostat (2004).

E-COMMERCE AND DEVELOPMENT REPORT 2004 30 CHAPTER 2: E-BUSINESS AND SMEs

Chart 2.2 From a policy perspective, information on SME use and the impact of ICTs is crucial. SMEs com- Internet usage by size of prise the bulk of enterprises not only, but particu- enterprise: EU 15 larly, in developing countries. They normally (percentages) employ the majority of the workers in the country, both in manufacturing and in services. At the same time, their contribution to gross domestic product (GDP) is often small, and they serve the domestic rather than the foreign market.

How are SMEs different? Generally speaking, the overall capacity to absorb the new technologies is lower in SMEs. Some of the constraints they face relate to access to finance, availability of skills and know-how, and international exposure. Legal uncertainties related to cross-border e-commerce and the need to keep up to date on latest e-com- Source: Eurostat (2004). merce-related legislation (including in target markets) add another burden to SMEs, which often do not have legal departments. cent an extranet; computer networking or the presence of local area networks (LANs) was more pre- Unlike large companies, SMEs do not have estab- dominant in larger (i.e. medium-sized) firms (94 lished brand names; these, however, play an impor- per cent compared with 65 per cent of small firms). tant role as regards online business since customers Most common e-business applications were sourc- prefer to put their trust in well-known brands ing information and e-mailing with suppliers and rather than take the risk of buying from unknown customers. The surveys also showed that cost companies over the Internet. But establishing related to specialized technical skills was a major brand names requires heavy investments in interna- obstacle to the adoption of e-business. This was fol- tional marketing, which SMEs often cannot afford. lowed by security concerns with respect to provid- While setting up a website may be cheap, promoting confidential information (an increasing con- ing it effectively is expensive (UNCTAD, 2003b). cern), cost of hardware, lack of broadband services in the country, and legal and regulatory uncertain- SMEs lack logistics networks for the prompt and ties. The large majority of SMEs planned to reliable delivery of products, particularly in the increase their e-business investments over the next case of B2C e-commerce. Since shipping and han- three years, with higher values for medium-sized dling costs decrease with the volume of the trans- compared with small firms. action, SMEs are disadvantaged.

Chart 2.3 SMEs in Europe: Commercial activities using the Internet, 2001 (percentages)

Source: European Commission (2002a).

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 2: E-BUSINESS AND SMEs 31

On the other hand, there is a wealth of informa- porting SMEs. This will lead to an increased tion available on the Internet, which can be very uptake of ICTs by SMEs in developing countries. useful for SMEs’ operations. This ranges from trade information, information about potential customers’ profiles and creditworthiness, and C. Assessing e-business in model contracts, to manuals and guides on best developing countries business practices and how to engage successfully in exporting markets. The use of e-mail has proved to be a cost-effective means of communi- While the monitoring and measuring of ICT usage cating with suppliers and customers, and has in enterprises is increasing among developed coun- replaced the use of fax in many SMEs. tries, in many developing countries no statistical indicators on e-business have been collected yet (box 2.2). Therefore, almost no quantitative analy- Small companies also have certain features that sis is available on the impact of ICTs on develop- favour the rapid adoption of ICTs. For example, ing country firms and much of the available infor- their often hands-on managerial style allows quick mation is based on anecdotal and case study decision-making and enables them to follow rapid evidence. technological changes. This section will summarize the results of available e-business surveys and case studies on the Crucial to the adoption of e-business by SMEs are adoption of ICTs in SMEs in selected countries of potential returns and profitability. Unless there is developing Asia and Africa. It is not meant to clear evidence that the use of ICTs will increase offer a comprehensive overview of e-business take- business profits, there is little incentive for small up in the developing world, but reflects data and companies to invest in the new technologies and information available at the time this Report was the skills necessary for exploiting them effectively prepared. Most of the surveys and studies men- (OECD, 2004b). While a certain level of connec- tioned below were carried out on an ad hoc basis, tivity is present in most companies, such as Inter- responding to a specific demand (internationally, net access and a website providing company and regionally or nationally) by researchers or policy product information, moving towards more com- makers. While no (solid) cross-country analysis plex e-business and e-commerce applications can be performed, the section will extract some requires that benefits clearly outweigh costs. As commonalities and differences among countries. pointed out earlier, the effective adoption of e- The purpose is to highlight the particularities of e- business often depends on complementary invest- business in developing countries’ SMEs and the ments, such as those related to organizational and implications this may have for ICT-related policy- management changes and related training. This, making. however, could imply additional costs that SMEs may not be able to afford. 1. E-business surveys in developing Available studies suggest that the adoption of Asia ICTs by SMEs in developing countries is largely a market-driven process. Eventually, competitors As shown in chapter 1 of this Report, Asia has and buyers will prompt SMEs to improve internal over 200 million Internet users, a figure which management and to use the Internet. Global com- represents growth of almost 100 per cent from petition is a driver of ICT uptake among SMEs, in 2000. China represents almost 28 per cent of that, particular those targeting the export market. For followed by Japan with approximately 27 per example, in certain industries (e.g. agricultural cent. However, it is Singapore, with only 2.1 mil- products, handicrafts) foreign buyers in developed lion users, that leads the rankings. countries already expect their suppliers (i.e. SMEs in developing countries) to participate effectively Asian countries/territories figure prominently in in the global online supply chain (see the case of the e-readiness rankings of the Economist Intelli- Indonesia, below). In this case, foreign buyers gence Unit (EIU) and the Global Information Tech- want to be close to the producer in order to have nology Report (GITR).3 Singapore (seventh) and more control over design, quality and delivery, Hong Kong SAR (ninth) are in the EIU top ten, and they therefore invest in educating and sup- while Singapore is also the second country after

E-COMMERCE AND DEVELOPMENT REPORT 2004 32 CHAPTER 2: E-BUSINESS AND SMEs

Box 2.2 Towards official statistics on e-business

So far, few developing countries have started to systematically collect information society statistics, including e-commerce and e-business data. This is due to, among other things, the lack of awareness among policy makers of the need for information society statistics and indicators, as well as limited resources and capacities in national statistical offices.

The majority of developing countries are just beginning to recognize the importance of collecting ICT statistics, driven by the policy debates that are taking place at the international level, for example in the context of the WSIS. As a result of such debates, a number of initiatives are emerging with the objective of advancing the production of ICT statistics in developing countries and working towards international harmonization of the data and indicators (see chapter 1 and web site measuring-ict.unctad.org).

International comparability is crucial to the development of statistics and indicators in all areas, including on the information society. So far, most of the methodological work at the international level has been carried out by the OECD, which has started to work on common definitions, methodologies and model surveys for the collection of ICT indicators in the mid-1990s (OECD, 2002b). Since then, considerable progress has been made, as a result of which a number of OECD countries are now collecting e-business (and other ICT) indicators on a regular basis. For example, a model questionnaire on ICT usage in enterprises was adopted in 2001 and has since been used in many OECD countries. Similarly, EU members have used the model questionnaire to design their business and household surveys, which are carried out on an annual basis. Currently, a module on e-business activities is being developed; its aim is to collect ICT usage indicators related to customer acquisition and retention, finance and account management, product service and support, or logistics and inventory control.

International comparability of ICT indicators needs to take into consideration definitions of business size and industries. For example, cut-off numbers of employees for "small" companies may vary across countries, leading to shifting weights of different size groups (OECD, 2002b). In some countries, business surveys do not cover all sectors, and this can result in misleading international comparisons. The model surveys developed by the OECD help to harmonize the definition of indicators, thus contributing significantly to the international comparability of ICT data.

But to what extent can the definitions and model surveys that were developed in an advanced country context be applied to developing countries? Some of the main challenges which enterprises (and particular SMEs) in developing countries face include lack of management and ICT skills, international exposure, and trust in online payments or access to international credit cards, and slow and unreliable connections. In particular, there is no universal access to the Internet in most poor countries and huge urban–rural divides exist. the United States in the Networked Readiness The Asia Foundation has carried out a project to Index (NRI) ranking of the GITR 2003-2004. survey the use of the Internet and e-commerce in Other countries/territories high in both rankings four South-East Asian countries – Indonesia, the are Japan, Taiwan Province of China, the Repub- Philippines, Sri Lanka and Thailand.5 The data lic of Korea, Australia and New Zealand. were collected at the end of 2001. Since then, many companies have connected to the Internet Increasingly, there are synergies between the and thus some of the results may look different region’s leading operators and vendors, in particu- today. Furthermore, the selection of SMEs for the lar in the telecommunications sector. For exam- survey was not based on a random sampling, ple, a Japanese mobile Internet provider has set up because Internet penetration was too low at that a research and development facility in China to stage (i.e. the number of companies using the develop fourth-generation technology (EIU, Internet as a percentage of total Internet users was 2004). Also, Asia is an emerging market for out- still very small). Therefore, the companies are not sourcing, as evidenced by India’s IT-enabled serv- representative of all SMEs in each country and the ice sector, call centres in the Philippines, customer surveys do not reveal how many companies use help desk centres in Malaysia, and Korean-lan- the Internet. Rather, they look at those that use guage and Japanese-language software production the Internet, plus some non-users and prospective houses in China.4 Basic connectivity and related users. investment remain low in many countries; for example, India ranks 46th in the EIU e-readiness Nevertheless, the surveys provide a useful over- ranking and 45th in the NRI ranking despite its view of Internet uptake by SMEs in the four coun- strong outsourcing sector (estimated at $17 billion tries and find certain commonalities that can be annually). applied to all of them. Generally speaking, the

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 2: E-BUSINESS AND SMEs 33 studies revealed three types of SMEs: (i) Internet with e-mail before moving to setting up a website users, (ii) prospective Internet users, and (iii) tradi- and using the Internet for research and IT devel- tional companies, namely those that have no opment. E-mail was by far the most commonly intention of using the Internet in the future. used Internet application of SMEs, which used it for interacting with customers, followed by busi- Internet users were found to be further advanced in ness-related research on the Internet. Websites are areas such as production management and capac- used to promote products rather than to carry out ity, capital accumulation, accounting, marketing online transactions (or e-commerce). B2B e-com- or English-language skills. The owners of these merce was almost non-existent, particularly at the companies had advanced degrees or long-term domestic level. Exporters of both goods and serv- experience in their industries; in fact, a strong link ices (e.g. the tourism industry) used the Internet could be identified between the level of education much more than those selling to the domestic and experience of the business owner/manager market. Country-specific evidence is presented in and the effectiveness of the company's Internet box 2.3. usage.

Companies that were prospective Internet users The studies found that profitability is crucial to were working to improve their management SMEs' willingness to go online. If companies expe- standards, but were still struggling with internal rience a positive impact on their business, for challenges such as credit issues, financial manage- example an increase in the number of customers, ment or obtaining short-term loans. However, they are willing to invest in hardware and connec- they were aware of the importance of marketing tivity. In other words, the readiness of SMEs to and reaching out to customers. invest in ICTs is not necessarily a cost factor.

Traditional companies (non-users) had a passive approach to doing business in general. Their main SMEs located outside major cities are clearly disad- focus was on production, and not on market out- vantaged in terms of Internet access. The rural– reach. Non-users were characterized by a lack of urban digital divide materializes in terms of higher awareness about the potential of ICTs and a man- connection fees, insufficient number of lines, and agement indifference to technological progress. slow and unreliable connectivity. For example, in Thailand the main criterion for choosing an Inter- The surveys also revealed a certain pattern of net service provider (ISP) was the connection Internet usage among SMEs: they usually start speed.

Box 2.3 Examples of ICT usage by Asian SMEs

In Thailand, half of the companies surveyed had websites, in particular those active in the tourism sector. Around 40 per cent of these had online ordering applications, and 13 per cent were members of e-portals.

In the Philippines, while nearly all SMEs consider the Internet and e-commerce important, exporters were more inclined to use ICTs and the use of e-commerce was still very basic. The Internet was mainly used for communication and research and for maintaining business relationships through e-mail. Business deals were often closed in a face-to-face interaction, not online.

In Indonesia, the tourism sector is a very active user of the Internet. For example, in Bali, online travel companies support small hotels that do not have computers or the Internet by taking online orders for them. Hotels reported that their average occupancy rate increased from 20 to 90 per cent as a direct result of web listings. Ten per cent of the SMEs surveyed had sold online — for example, jewellery suppliers in Bali sell to retailers and individuals in other countries. In this case, online payment facilities are important for customers who do not want to disclose credit card information by regular mail or make international money transfers for low-value transactions. B2C e-commerce was almost non-existent, in particular at the domestic level, owing to high online payment and delivery costs. Domestic B2B e-commerce still relies on faxes to confirm orders and does not accept the legitimacy of e-mail confirmations.

Source: www.asiafoundation.org/ICT/surveys.html

E-COMMERCE AND DEVELOPMENT REPORT 2004 34 CHAPTER 2: E-BUSINESS AND SMEs

The studies also revealed that e-payments were regard to the impact of ICTs on productivity (see rare, and even for sales generated online most section B). payments were made by bank transfer. Less than 30 per cent of SMEs with websites accepted online payments. An exception was in Sri Lanka, 2. Surveys and case studies from where 60 per cent of SMEs with websites were Africa equipped for online transactions via credit cards. The main reasons for the low use of e-payments were security concerns in relation to Internet Africa is the region with the fewest Internet banking, fear of credit card fraud and fear that users, although their number has doubled since products would not be delivered or would be 2000 (see chapter 1), and information on ICT substandard. usage indicators is largely incomplete. South Africa represents nearly one third of Africa’s Internet users and has the highest EIU and NRI The four country studies draw a number of note- rankings in the region (32nd and 37th, respec- worthy policy conclusions (further addressed in tively). section E). Since neither cost nor technical ability was found to be the main barrier preventing the However, uptake of Internet services, including SMEs surveyed from going online, credit and broadband, has been modest at 7 per cent of the training were not considered the most important population. The EIU cites high costs and inade- policies to put in place and would not necessarily quate coverage of high-speed connections, partly accelerate the adoption of ICTs by SMEs. The owing to the lack of market competition. None- subsidization of SMEs' adoption of ICTs was thus theless, South Africa has developed a competi- not recommended by the authors. Rather, Gov- tive advantage in business service processing, and ernments should concentrate on the necessary reg- the Government spends over $1.2 billion annu- ulatory and legal changes, such as e-commerce legally on its own IT infrastructure, much of it sup- islation (online contracts, fraud), banking laws to porting e-government interfaces. Elsewhere in ensure that credit card and foreign currency trans- the region, the national telecommunication com- actions are affordable and enforceable, and deregu- pany in Algeria is investing in next-generation lation in the telecommunications industry to mobile systems supplied by Chinese vendors. lower costs and increase access outside major However, the rate of Internet penetration in cities. Algeria is at 16 users per 1,000 people, owing to poor telecommunications infrastructure and high costs, and this poses difficulties for the develop- In another study, on the adoption of e-business by ment of e-commerce. SMEs in three manufacturing sectors (garments, automobile components and electronic goods) in India, the authors found that the use of advanced The UNECA SCAN-ICT project has carried out a e-business tools is greater in the electronic goods number of country studies (Ethiopia, Ghana, and garment sectors than in manufacturing (Lal, Morocco, Mozambique, Senegal, Uganda) to assess 2004). The study also revealed a strong correlation the penetration of ICTs, including among busi- between the level of academic qualification (higher nesses. In the case of Ghana (INIIT, 2002), 81 per education) of the company manager and the inten- cent of firms surveyed had Internet access, 35 per sity of ICT use by the firms; between the skill cent had Web presence and 16 per cent were intensity of employees and ICT use; and between engaged in e-commerce. In other countries, SCAN- the size of the firm and the adoption of e-business. ICT has obtained different insights related to ICT On the other hand, capital intensity (measured as use by businesses. For example, lack of an e-com- capital employed per capita) did not seem to merce regulatory framework and adequate infra- impact on the use of ICTs. The author also found structure was identified in Mozambique as an a positive relationship between profitability and impediment in the development of e-business in the level of intensity of ICT tools, with firms the country. In Ethiopia, a closed market (govern- using more advanced e-business tools having ment monopoly) posed obstacles to the develop- achieved higher profitability, in particular in the ment of ICT infrastructure and services, and there electronic goods sector. This confirms findings was a lack of awareness of the wider business appli- from studies in more advanced countries, with cations of ICT (computers are viewed mainly as

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 2: E-BUSINESS AND SMEs 35 office tools).6 Nonetheless, Internet subscribers 2001. It is therefore assumed that the overall trend have increased in Ethiopia (over 6,000 subscribers will be an increased adoption of ICTs, in particu- in 2002, with 96 per cent in Addis Ababa and the lar website use, followed by more complex e-busi- rest in 11 other towns), and there were 2.5 sub- ness applications. scribers per 1,000 people in the capital versus 0.24 in other towns. From 2001 to 2002, the number of The Government of Egypt, together with the local websites increased from 68 to 88. Information InfoDev programme of the World Bank, carried on other SCAN-ICT countries is given below. out a study on the role of ICTs in developing SMEs in Egypt, focusing on the apparel and In 2001, a survey was carried out in Senegal with home-textiles sector (MCIT/InfoDev, 2003). In medium-size and large industrial enterprises 2003, they surveyed approximately 70 per cent of (UNRISD, 2002). Even though the survey did not all exporting firms in the sector, contributing to include small enterprises, it is worth noting that 95 per cent of the export volume. They found a the use of the Internet was very limited among the clear relationship between the size of companies enterprises (hence it is likely to have been even and their e-readiness and usage. Small firms (here lower among small firms). While almost all of the defined as employing between 30 and 200 work- firms (92 per cent) were connected to the Internet, ers) were largely managed by the owner, who in most cases only the head of the enterprise had was often unaware of the different technologies access (too costly, not necessary). The most com- and too busy with daily operations. At the same mon use of the Internet was for e-mail, and a small time, almost 100 per cent of small companies are number of firms had their own website. E-mail was connected to the Internet and use e-mail (i.e. this used to communicate primarily with suppliers, fol- figure is similar to the one for medium-sized and lowed by internal company exchanges and custom- large enterprises). The Internet is largely used for ers. E-commerce and e-business were practically external communication with suppliers and cus- non-existent. By way of explaining why the Inter- tomers via e-mail, and to a lesser extent for net was not used very much, companies mentioned research and marketing. E-commerce was found that the “profitability” or commercial usefulness to be of less importance to the development of and immediate returns for the investment in ICTs their sales and marketing. Companies reported were not clear, or that surfing the Web wasted that lack of qualified personnel was the main time. Another reason was that their partners, such barrier to further development of ICTs, but were as customers and suppliers, the Government, reluctant to invest in staff training since they banks and insurance companies, were not using the might not be able to retain these investments. Internet (yet) and therefore were not able to inter- Other reasons included the perception that there act with them online. Given the poor telecommu- was no need to use ICTs and that many of the nications infrastructure in most of the countries of smaller operations could be carried out effi- the Economic Community of West African States ciently offline. (ECOWAS), no commercial ties have been created through the Internet with partners at the regional level. Furthermore, concerns related to Internet In 2002, the Moroccan Government conducted security (virus transmissions, malfunctioning, pri- a large e-business survey of more than 4,000 vacy of information) prevented them from adopt- firms in the industrial sector (food, textiles, ing the new technologies. Finally, the overall lack chemicals, mechanical engineering, electronics) of local, “Senegalese” content useful for entrepre- as a follow-up to a similar survey conducted in neurs (including business information, legal and 1999.7 They found that all firms have personal regulatory documents, and administrative forms) computers (PCs) (with an average of 8 PCs per was noted as a major reason for not using the Inter- company compared with 6 PCs in 1999); 42 net more frequently. At the same time, business per cent of firms were connected to the Inter- owners felt that, in particular, online government net (compared with 20 per cent in 1999); 11 could significantly contribute to reducing costs in per cent had a website (5 per cent in 1999); terms of both time and transport. and 7 per cent had an intranet (question not asked in 1999) (table 2.1). Nevertheless, the use of the Internet has increased rapidly among medium-sized and large Senegalese The Internet was primarily used for e-mailing and firms, from 13 per cent in 1996 to 92 per cent in information search, followed by file transfer, and

E-COMMERCE AND DEVELOPMENT REPORT 2004 36 CHAPTER 2: E-BUSINESS AND SMEs

Table 2.1 Results from e-business surveys, Morocco, 1999 and 2002

1999 2002 Number of PCs per firm (ave.) 6 8 Internet connection (%) 20 42 Web presence (%) 5 11 Intranet (%) --- 7 E-commerce (%) 8 8 the search for suppliers and customers. The com- including microenterprises. The authors found panies’ websites were primarily used for dissemi- that, overall, the level of adoption of e-business nation of business information, followed by was higher in the higher-skill sectors of electrical online orders. More than half the companies use and electronic goods than in the more labour- third-party providers to host their websites. As far intensive sectors of auto-components and food as e-commerce is concerned, 8 per cent of firms and beverages. reported that they engaged in e-commerce (online ordering). It is important to note that this is the In the case of Uganda, only a few firms (3 out of same as in 1999, and hence no increase in online 84 surveyed) were at an advanced level of e-busi- transactions has occurred. Among the sectors, the ness adoption. Most used the Internet for e-mail- most active ICT users were firms in the electron- ing, and little e-business in production processes ics and textiles/leather sectors, but the largest or supply chain management was present. The increase in Internet connection and website pres- authors concluded that in these cases e-business ence was among the food and mechanical sectors. adoption was mainly driven by vendors, rather The main perceived barrier to using ICTs was the than by a change in the firms’ business strategies. cost of hardware and software and of ICT services, Firms engaged in trading (such as in the food and followed by the lack of IT skills and awareness. beverage sector) were greater users of e-business than those in manufacturing, mainly for coordi- The survey also revealed a clear correlation nating their activities with customers and between the use of ICT and the size of the com- suppliers. pany with respect to the number of firms connected to the Internet or having websites or intra- The Nigerian survey covered 105 SMEs and nets. However, while the difference between small microenterprises (fewer than 10 employees) in the and medium-sized companies was less significant, engineering sector. More than one third of the major differences exist between SMEs and large firms did not use any ICTs at all, primarily those companies. Although the survey was very com- whose managers had a low standard of academic prehensive in its design, it did not include any qualifications. Those firms that adopted higher questions concerning the use of ICTs for specific levels of e-business were all run by managers with business processes, such as human resource man- an engineering background, and had more skilled agement, customer relationship management or employees (engineers and graduate degree holders) value chain management. Hence, no information among the workforce. In other words, limited is available on the firms’ use of ICTs for internal skill levels in SMEs were a key factor for low ICT business functions or integration with suppliers' usage. and customers’ systems. Humphrey et al. (2004), in an e-commerce study In 2002, a survey of firms in the auto-components, carried out in 2002 with 47 SMEs from the garment food and beverage, electronic goods and engineer- sector in Bangladesh, Kenya and South Africa, ing manufacturing sectors was conducted in found that while all of them had connections to the Uganda and Nigeria (Oyelaran-Oyeyinka and Lal, Internet, very few were conducting B2B e-com- 2004). The objective was to identify factors that merce. About a third of the firms had an intranet, influenced the adoption of e-business by SMEs, mainly those from South Africa, and it was used

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 2: E-BUSINESS AND SMEs 37 for sharing databases and documents. Only 20 per ited impact on business profitability, often cou- cent of companies had used the Internet for buying pled with the argument that few suppliers and cus- and selling. This included e-mail orders, and there- tomers are online. Other constraints relate to fore comparisons with other studies (not including cyber security, and lack of local content and the e-mail orders/purchases) are limited. Similarly, necessary legal environment (e-commerce, online looking at 27 SMEs in the horticulture sector in payments etc.). Kenya and South Africa, the authors found that while all of them used the Internet, only 19 per Few of the surveys presented above focused in cent had their own website (13 per cent in Kenya detail on the use of ICTs in specific business func- and 25 per cent in South Africa) and only 7 per cent tions (e.g. CRM, distribution and logistics). As had an intranet. The companies used e-mail prima- mentioned at the beginning of the chapter, study- rily to maintain their customer relationships. For ing e-business is a rather recent phenomenon and example, Kenyan horticulture exporters sent daily even in OECD country surveys, e-business ques- e-mail attachments informing their importers in tions are only now being incorporated. The fol- the United Kingdom about their planting sched- lowing section presents the result of an e-business ules, output projections and delivery details. Pro- survey conducted by UNCTAD in Latin Amer- ducers from South Africa sent digital images to ica, which included several questions related to their importers showing the quality of their prod- ICT adoption in business processes. ucts. About 30 per cent of the companies surveyed had used the Internet for selling or purchasing goods or services, including via e-mail. D. The case of Latin America: E-business survey results The International Trade Centre (ITC, 2004), as part of its e-Trade Bridge Programme, has evalu- Estimates of the number of Internet users in Latin ated a number of SMEs with regard to their use of America vary, but all sources point to rapid ICTs and the impact of the latter. They found that, growth during the past few years (see chapter 1). for example, in South Africa a company building Accenture estimated 44 million users in 2004, model ships used the Web and e-mail effectively in while eMarketer estimated 60.6 million.8 Mobile order to enhance management capabilities in pro- phones are increasingly providing a channel for duction and marketing and thus tap international basic electronic services (subscriptions in the markets. The adoption of ICTs successfully turned region grew by 18 per cent in 2003), although a small business into a global business employing mobile Internet services are still in their infancy. 40 staff and with a turnover of $600,000 a year. The EIU e-readiness leaders in Latin America are Similarly, the Internet enabled a trade logistics pro- Chile (29th) and Brazil (35th), which are also lead- vider in the United Republic of Tanzania to ers in the NRI ranking (32nd and 39th, respec- streamline and speed up business procedures con- tively). Interestingly, Argentina is 37th in the EIU cerning customs, tracking and handling, thus e-readiness ranking, owing to its position as an reducing costs and increasing productivity. outsourcing “powerhouse”, but occupies 50th place in the NRI ranking, after Mexico and Costa The results of the surveys and studies from devel- Rica. Government and private initiatives are help- oping Asia and Africa reviewed in this section ing along progress in e-business; for example, a show that, generally speaking, the number of law on digital signatures was recently passed in SMEs connected to the Internet is quite high (even Mexico and efforts are being made by the national in African countries) but the adoption of e-busi- telecommunications company to accelerate the ness practices is quite low. Internet access is often installation of Internet services. In Brazil, a private limited to the company owner or manager and its group will install free broadband in State schools, main use is e-mailing and information search. contributing to an expected doubling of the coun- While website presence and online ordering/sell- try’s broadband rate. ing are growing, they are growing much more slowly. Despite the fact that several studies have More data on e-commerce and e-business are demonstrated the correlation between ICT adop- becoming available, but they are still scarce. tion and firm profitability/productivity, one of Recently, a number of Latin American countries the major reasons for not using the Internet (from started to include ICT questions in their busi- the viewpoint of the company owner) is the lim- ness surveys, for example Argentina, Chile,

E-COMMERCE AND DEVELOPMENT REPORT 2004 38 CHAPTER 2: E-BUSINESS AND SMEs

Colombia, Peru and Mexico (ECLAC, 2004). In In order to assess the uptake of ICTs by SMEs in most countries, however, data on e-business are the region and to obtain comparable results across not yet collected through the official statistical countries, UNCTAD, jointly with FUNDES (see system on a regular basis, and therefore only lim- box 2.4), has carried out an SME e-business survey ited data are available on the use and impact of in five Latin American countries – Chile, Colom- ICTs in enterprises. Furthermore, some of the bia, Costa Rica, Mexico and Venezuela. ICT-related questions that have been included in the country surveys differ between countries. As Using the FUNDES infrastructure (i.e. local call a result, the indicators collected are not always centres in the countries) and SME database, during comparable across countries, or at the interna- the months of February and March 2004, tele- tional level. phone interviews were carried out with a total of

Box 2.4 FUNDES: E-business for SMEs in Latin America

The Fundación para el Desarrollo Sostenible en América Latina (FUNDES) is a network of enterprises and private institutions that works to promote the competitiveness and sustainable development of small and medium-sized enterprises (SMEs) in Latin America. It has offices in 10 countries (Argentina, Bolivia, Colombia, Costa Rica, Chile, El Salvador, Guatemala, Mexico, Panama and Venezuela) as well as a training agreement with an institution in Peru. FUNDES has 280 employees and more than 400 consultants and facilitators, and approximately 80,000 SMEs are included in its database.

FUNDES provides services geared primarily to improving SMEs’ access to information, know-how and technology (consulting and training), and access to finance, and to supporting the development of entrepreneurial initiatives. In this context, it appointed in 2000 an international e- business manager to lead projects related to the Internet and to develop and implement a FUNDES e-business strategy. It has offered a training programme on the Internet and e-commerce, as well as consulting services for technological innovation, product and services innovation, and business development on the Internet. FUNDES has also partnered with information technology providers (Tecno-PYME) to offer business server packages, including technical diagnosis and support, conceived specifically for SMEs.

Furthermore, FUNDES created the MIPYME online business portal (http://www.MIPYME.com/), which allows SMEs to register and interact with other enterprises in their country, region and economic sector. MIPYME.com is also essential to the organization of a networking initiative that matches large companies requiring products and services with SMEs offering to provide these; online tools are used to initiate con- tacts between potential buyers and suppliers and to schedule physical meetings. More than 2,100 SMEs participated in this networking initiative between 2001 and the first half of 2004, and 80 per cent of them conducted transactions. The networking initiative has provided some lessons:

• Success is determined by a link between the online and the real world (virtual contact and information exchange, followed by actual meetings). • The promotion of ICT use by SMEs must offer added value to be successful. • Results are important to SMEs, not the process itself. • Quality control must be ensured in order to encourage continued participation by buyers.

In addition, all of FUNDES’ services have been integrated into MIPYME.com: online consulting and assistance, auto-diagnosis and distance learning, networking, e-business services, information on country business/market indicators, access to entrepreneurial capital, financial intermediation and even online credit (Banco Santander, Chile). An example of an SME that benefited from FUNDES' roundtables organized through MIPYME.com is Negocios Múltiples de Panamá (Nemupasa), which gained new clients and contacted new potential suppliers. As an authorized distributor of multinational 3M and a partner of US-based Prime Meridian Trading Corp., Nemupasa was able to secure a contract as supplier to the Panama Canal authority and a number of private clients.

The strategic partners of FUNDES help mobilize resources for its work and include the World Bank's International Finance Corporation, the Multilateral Investment Fund of the Inter-American Development Bank, German and Swiss cooperation enterprises, the Andean Develop- ment Corporation, and foundations such as AVINA and Argidius.

Source: http://home.fundes.org/

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 2: E-BUSINESS AND SMEs 39

Table 2.2 Latin American SME survey sample

Manufacturing Services Wholesale and retail trade Total Small enterprises (11-50 employees) 87 85 87 259 Medium enterprises (51-200 employees) 64 67 64 195 Total 151 152 151 454

454 SMEs – 90 in Chile, 90 in Colombia, 92 in explain some of the differences in e-business across Costa Rica, 90 in Mexico and 92 in Venezuela. In countries. each of the five countries, SMEs are classified differently. For the purpose of this survey, the The survey carried out for this study is based on following definition was used: small (11–50 previous work on measuring e-business in the employees) and medium (51–200 employees). OECD. The OECD model questionnaire on ICT The sample was stratified according to the size of use in enterprises was used as a basis for preparing companies, with a slight bias towards small com- the questionnaire for this survey.9 An effort was panies (195 medium-size enterprises, 259 small made to adapt the questions to the local context enterprises) and certain economic sectors (see table and to the particular methodology used for this 2.2). The companies included in the database are survey (i.e. telephone survey). Some questions, mainly located in the capital cities of these coun- such as those concerning e-commerce via EDI or tries. Therefore, the urban–rural divide could not computer-mediated networks other than the Inter- be analysed through this survey, and the survey net, were excluded. On the other hand, questions results therefore represent only SMEs in urban about future needs regarding the use of ICTs were areas. added. The questionnaire was therefore adapted to meet concerns and needs specific to SMEs in the The questionnaire was divided into four modules countries surveyed. (see annex I for complete questionnaire): 1. Availability of ICTs (PCs, Internet, Module A: General information on ICT systems (including availability of PCs, Inter- websites) net, e-mail, intranet, extranet) It was found that 97 per cent of the SMEs sur- Module B: Use of Internet and ICT (including veyed used PCs, 94 per cent used the Internet and types of connection, type of use of 92 per cent used e-mail (chart 2.4). Interestingly, Internet and website, e-commerce, none of the companies used the Internet in public use of ICTs for internal and external locations such as Internet cafes, and only a very business processes) small number used it at home. This shows that the Internet is easily available to SMEs in urban areas Module C: Perceived impact of the use of ICT in the countries surveyed and that there is no need and Internet on SMEs for the communal access points (for companies), as is often the case in rural areas. Furthermore, Module D: Perceived barriers and needs as about half the companies had intranets, but only regards the use of Internet and ICT 14 per cent had extranets. While PC, Internet and in general e-mail usage was fairly similar among the five countries, intranet and extranet use was much The latter two (perceived impact and barriers/ higher in Chile and Venezuela than in Mexico and needs) are qualitative measures and therefore need Costa Rica. to be interpreted with caution. In particular, using qualitative indicators for international compari- No major differences between small and medium sons is risky. On the other hand, if used in combi- companies were observed as regards PC, Internet nation with quantitative indicators, they could and e-mail usage (although a somewhat higher

E-COMMERCE AND DEVELOPMENT REPORT 2004 40 CHAPTER 2: E-BUSINESS AND SMEs

Chart 2.4 ICT use by SMEs, by country

number of medium-sized companies was using Chart 2.5 e mail). On the other hand, 52 percent of medium- sized companies used intranets as compared with Use of intranet and extranet by 35 per cent of small companies, while 15 per cent enterprise size used extranets as compared with 12 per cent of small companies (chart 2.5).

As far as the different sectors are concerned, again, there are no major differences with regard to use of PCs, Internet and e-mail. But intranets were most common in services (53 per cent of all services companies), followed by the wholesale and retail trade (38 per cent) and manufacturing (37 per cent). Extranets were also most common in services companies, followed by manufacturing and trade. connection, whereas modem use was very low. In In conclusion, the results show that the availabil- Mexico, fixed connections under 2 Mbps were the ity of PCs, Internet and ICT is high among com- most common, in Costa Rica modem connec- panies located in urban areas, and there are no sig- tions, and in Colombia ISDN (chart 2.7). Small nificant differences between small and medium- enterprises were mainly using modem connec- sized companies as regards basic access and use of tions (40 per cent), whereas among medium-sized the Internet (such as e-mail). enterprises fixed connections over 2 Mbps were the most common (37 per cent). No major differ- The most common type of Internet connection ences exist according to the activities of the was fixed connections over 2 Mbps and analogue enterprises. modem (32 per cent of all SMEs for each type), followed by fixed connections under 2 Mbps (16 2. E-business per cent) and ISDN (13 per cent) (chart 2.6). Here, significant differences exist among the countries. For example, in Venezuela and Chile, fixed con- The module on e-business was the most complex nections over 2 Mbps were the most common one, comprising a range of questions about how

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 2: E-BUSINESS AND SMEs 41

Chart 2.6 Types of Internet connection by country (percentages)

the companies use ICTs (e-mail, customer care, tion search are concerned, values were similarly internal management etc.) and to what extent. high. But in Venezuela, 95 per cent of firms use the Internet for financial services, compared with Among all companies, e-mail was the most com- only 48 per cent in Mexico. Furthermore, Internet mon use of the Internet (98 per cent), followed by use for communicating with the Government was searching for information (90 per cent), banking 77 per cent and 73 per cent in Colombia and Ven- and financial services (80 per cent), monitoring the ezuela respectively, compared with 16 per cent in market (54 per cent), communicating with public Mexico (chart 2.9). Service sector companies are authorities (53 per cent) and looking for informa- more active users of the Internet, having above- tion concerning employment opportunities (27 average figures for all Internet activities, in partic- per cent) (chart 2.8). With regard to differences ular as regards interaction with public authorities among countries, as far as e-mailing and informa- and monitoring the market. Chart 2.7 Types of Internet connection by size (percentages)

E-COMMERCE AND DEVELOPMENT REPORT 2004 42 CHAPTER 2: E-BUSINESS AND SMEs

Chart 2.8 SMEs’ use of Internet, by sector (percentages)

More than half of the companies had their own online payments via their websites. And only 9 website and 22 per cent were considering creating per cent featured back-end integration with their one within the next two years. Those with web- suppliers/customers through their sites. The latter sites mainly use them for customers to directly figure was particularly low among manufacturing send inquiries to the company, for making availa- firms. Again, services companies were the most ble product information and for providing after- active users of their website. One fourth of serv- sales support (chart 2.10). Only 12 per cent of the ices companies with a website offer digital prod- companies offer secure online transactions or ucts through their sites. Chart 2.9 SMEs’ use of Internet, by country (percentages)

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 2: E-BUSINESS AND SMEs 43

Chart 2.10 Website functionalities by sector (percentages)

No major differences were found among the coun- or provided figures ranging from 1 to 90 per cent tries with respect to the number of companies of total purchases. with websites or planning to set up one in the next two years, except Mexico, where figures were Interestingly, no major difference could be lower in terms of companies with a website and observed with regard to firm size; in fact, the per- higher for companies planning to create one in the centages of small firms buying and selling online near future. More medium-sized than small com- were even slightly higher than those of medium- panies had websites, and more companies in the sized firms. But small firms use e-markets (rather services sector compared with trade and manufac- than their own sites) more than medium-sized turing. While no major differences were observed ones (chart 2.14). There are some interesting dif- with regard to size, small firms tend to use web- ferences among the countries: as far as online pur- sites more for showcasing their products, whereas chases are concerned, firms in Costa Rica have medium-sized firms largely use them for client mainly used e-marketplaces, whereas most of the contact. firms in the other countries bought directly Chart 2.11 As far as e-commerce — or the online ordering and selling of products — is concerned, purchases are Online transactions by sector much higher than sales (this is the case globally), (percentages) with 38 per cent of all firms having purchased online during 2003 (two thirds from third-party websites, one third in e-marketplaces), compared with 13 per cent which had sold products over the Internet (charts 2.11 and 2.12). In some countries, firms were more engaged in online buying and selling, for example Costa Rica (59 per cent) and Chile (54 per cent), compared with Colombia (27 per cent) and Mexico (16 per cent) (chart 2.13). Asked about the amount of purchases made online, most firms either did not know the answer

E-COMMERCE AND DEVELOPMENT REPORT 2004 44 CHAPTER 2: E-BUSINESS AND SMEs

Chart 2.12 Internet transactions by sector (of total transactions) (percentages)

through other companies’ websites. Similarly, the percentage of clients and suppliers found Costa Rican firms made most of their online sales through the Internet. This confirms findings from through either e-marketplaces or third-party web- surveys carried out in other regions, such as the sites, whereas, for example, firms from Chile and European Union. Colombia made all of their online sales through their own websites (chart 2.15). Using ICTs for internal business functions is becoming part of the business strategy of many The companies were also asked about the amount enterprises in advanced countries (see section B) of online sales and purchases; however, this was and the questionnaire therefore included ques- difficult to answer for most of them and therefore tions concerning the use of computer networks the results are not conclusive. Similarly, most for automating certain business tasks and inte- companies were unable to provide information on grating with systems of other companies. Among

Chart 2.13 Online transactions by country (only companies with Internet) (percentages)

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 2: E-BUSINESS AND SMEs 45

Chart 2.14 Online transactions by size (percentages)

the SMEs surveyed, 48 per cent reported using than in Mexico (27 per cent and 2 per cent an intranet, and 14 per cent use extranets. All of respectively) (chart 2.4). As mentioned earlier, the firms that reported having an extranet also intranet and extranet use increases with firm size reported having an intranet, with higher percent- (chart 2.5). ages among medium-sized companies and those in services. Intranet and extranet use was more The companies were asked a number of ques- common in firms in Chile and Venezuela (59 and tions concerning the use of computer systems 55 per cent respectively of firms with intranets for various business functions, such as cus- and 25 and 23 per cent of firms with extranets) tomer relationship management, value chain

Chart 2.15 Online transactions by country (percentages)

E-COMMERCE AND DEVELOPMENT REPORT 2004 46 CHAPTER 2: E-BUSINESS AND SMEs

Chart 2.16 E-business processes by enterprise size (only companies with intranet) (percentages)

management, knowledge management, planning From the survey results, it was not clear whether of resources and inventory, the use of applica- all companies understood the question in the same tion service providers, document control, man- way. For example, a number of companies agement of working hours, training and answered positively to the question about using accounting (see box 2.1). Some of these func- computer systems for “accounting” and “docu- tions involve a higher degree of automation ment control” but negatively to the question about (e.g. value chain management) than others (e.g. “intranet”. It is possible that they simply meant document control). that they used computers for managing their data-

Chart 2.17 E-business processes by sector (only companies with intranet) (percentages)

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 2: E-BUSINESS AND SMEs 47 bases rather than a networked system of storing, ing online systems in their business tasks, with retrieving and sharing data or an automated updat- higher values for all applications (in order of ing of information and databases. The question importance): accounting, planning of resources should have clearly specified the automation of and inventory, document control, customer care, business processes and system integration of cer- knowledge management, management of working tain functions, as opposed to using stand-alone hours, training, management of value chain and computers for business tasks requiring human the use of ASPs via the Internet. In particular, intervention. value chain management and ASP use were significantly higher among services companies, with 53 Therefore, only those firms that indicated that per cent and 45 per cent of firms respectively they had an intranet (which include those with using these applications, compared with 30 per extranets) were selected, it being assumed that they cent and 23 per cent of manufacturing firms (chart would be at a more advanced stage of ICT usage for 2.17). internal business processes. Those with intranets (and extranets) reported that they used computerized systems for a number of business functions. It may be noted that when tasks become more com- All firms reported that they used computerized plex, in particular automating and integrating busi- systems for client relationship management, fol- ness processes, small companies are as active, and lowed by accounting, resource planning and inven- sometimes even more active users than medium- tory, and document control. These were the most sized firms. While e-commerce is used by all com- common applications, with more than three quar- panies, no matter what size and sector, small com- ters of firms responding positively. Least common panies use more e-marketplaces, whereas medium- were the use of computerized systems for training sized companies use company websites (of third or education (43 per cent) and the use of applica- parties or their own) for selling online. Services tion service providers (ASPs) (33 per cent) (chart companies are the most active users of ICTs and the 2.16). Internet, followed by trade and manufacturing (least active). This corresponds to findings else- No clear difference was found with regard to the where (see previous section) and is partly explained size of firms; in fact, higher values were reported by the fact that functions such as marketing and sell- from small firms for applying e-business for value ing services online require basic Internet access and chain management, ASPs, document control and website presence, and less system integration working hours management. Those involved in related to, for example, supply and value chain man- service activities were clearly more active in apply- agement, as is the case in manufacturing.

Chart 2.18 Perceived importance of ICTs by country (percentages)

E-COMMERCE AND DEVELOPMENT REPORT 2004 48 CHAPTER 2: E-BUSINESS AND SMEs

Chart 2.19 Perceived impact of ICTs by country (percentages)

Some important differences among countries can taken from companies located in Monterrey, the be observed as regards the uptake of Internet and business capital of the country, the intensity of ICTs: most active users are firms in Chile and ICT and Internet usage would have been higher. Colombia, followed by Venezuela. Firms in Mex- ico not only are less active online but also report 3. Main perceived impact of using ICT more barriers to the uptake of the Internet and ICTs than those in other countries (see below). Almost all companies (90 per cent) consider the One explanation of this could be the sample, use of ICT and the Internet important to their which mainly consists of companies located in businesses, and 76 per cent believe that having a Mexico City. It is likely that if the sample were website is important and are happy with their

Chart 2.20 Projected investment in ICTs by country (percentages)

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 2: E-BUSINESS AND SMEs 49

Chart 2.21 Barriers to ICT use by sector (percentages)

current use of ICTs. There are some differences, change in products offered as a result of ICT, com- however, among the countries: while almost 100 pared with 39 per cent of manufacturing firms. per cent of businesses in Chile, Colombia and Costa Rica think that the Internet is important, The majority of enterprises (68 per cent) were the figures are somewhat lower in Mexico and planning further investments in ICTs during the Venezuela. Similarly, having a website has a next two years (high or low), while 30 per cent higher priority in Colombia, Costa Rica and Ven- indicated they did not know yet (chart 2.20). ezuela than in the other countries (chart 2.18). However, there are some major differences among the countries: 96 per cent of companies in Colom- When respondents were asked about the main bia answered this question positively compared perceived impact or benefit resulting from ICT with only 26 per cent in Chile. This may reflect to usage, they gave the following answers (in order of some extent the current level of investment and importance): change in business processes (81 per the resulting needs for future investments. Small cent); customer relationship (78 per cent), supplier companies are ready to invest more in ICTs over relationship (74 per cent), business structure the next two years. This shows the dynamics and (57 per cent), and change in products and services rapid development of e-business adoption. (53 per cent) (chart 2.19). It is worth mentioning that companies in Costa Rica were particularly 4. Main perceived barriers and needs positive about the impact of ICTs on their to be addressed businesses, with very high percentages for each of the variables. Barriers to ICT use

Interestingly, small companies considered the Concerning the use of ICTs in enterprises, about impact of ICTs more important than did medium- half the companies reported that the costs related sized companies and were planning larger invest- to ICTs have much influence; this is followed by ments in ICTs for the next two years. They partic- insufficient knowledge of employees (42 per cent), ularly mentioned the impact that ICTs have on the short life cycle of software (41 per cent), the the types of products and services offered and fact that ICTs do not satisfy the needs of the enter- their overall business structure. Services compa- prise (38 per cent), a lack of readiness on the part nies consider having a website more important of clients or suppliers to use ICTs (34 per cent), than do trade and manufacturing companies, and and difficulties in finding and recruiting qualified 61 per cent of them indicated that there had been a employees (33 per cent) (chart 2.21). It is impor-

E-COMMERCE AND DEVELOPMENT REPORT 2004 50 CHAPTER 2: E-BUSINESS AND SMEs

Chart 2.22 Barriers to ICT use by country (percentages)

tant to note, however, that the companies that medium-sized companies indicated that costs responded otherwise considered these barriers to related to ICTs were the main factor influencing have little influence on their use of ICTs. ICT use (55 per cent compared with 43 per cent of small companies), in particular companies in The weight given to the various barriers differs the services sectors. In the manufacturing sector, among the countries. For example, while only 13 companies gave most weight to the notion that per cent of companies in Chile considered costs customers and suppliers were not ready to use related to ICTs to be a problem, 66 per cent of the Internet (42 per cent compared with only 28 Mexican companies considered this important per cent of firms in the wholesale and retail (chart 2.22). Interestingly, a higher percentage of trade).

Chart 2.23 Barriers to Internet use by sector (percentages)

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 2: E-BUSINESS AND SMEs 51

Chart 2.24 Barriers to Internet use by country (percentages)

Barriers to Internet use of the Internet across all countries, firm sizes and sectors, but especially as regards medium-sized Security concerns were by far the greatest barrier companies and those in manufacturing. This con- to Internet use among all companies (71 per cent), firms similar findings in other countries and followed by high development and maintenance regions, and reflects one of the main current con- costs (41 per cent), loss of time due to irrelevant cerns of Internet use globally. Internet surfing (37 per cent), the non-prepared- ness of customers to use the Internet (33 per cent), As with the use of ICTs, companies in manufac- and slow and unstable data transmission (32 per turing gave more weight to the fact that clients cent) (chart 2.23). All countries considered secu- and suppliers were not ready to use the Internet. rity concerns (including viruses) to be the most Services firms and small firms gave greater weight important factor influencing their companies’ use to the problem of slow/bad Internet connection.

Chart 2.25 Needs in respect of enhancing ICT and Internet use, by sector (percentages)

E-COMMERCE AND DEVELOPMENT REPORT 2004 52 CHAPTER 2: E-BUSINESS AND SMEs

Chart 2.26 Needs in respect of enhancing ICT and Internet use, by country (percentages)

Other needs of the surveys and studies presented in this chapter showed that in most cases, getting acess to the Inter- A number of needs were identified, which if met net was not a major problem for firms – even if con- could help SMEs to increase their use of ICTs and nections are mostly slow (dial-up modem). Much the Internet. The most important need with regard more difficult is to fully integrate the companies’ to the use of ICTs is the need to train employees. business functions using ICTs, and even more so for This is followed by (in order of importance) SMEs in developing countries, where frequently improved connectivity (speed, security etc.), better only managers have access to the Internet. The sur- hardware and software, product compatibility, and veys also confirm that there is a certain degree of consulting on strategy and implementation (chart development that all companies will go through 2.25). In all countries, staff training and improved when adopting ICTs. This is illustrated in chart connectivity were accorded great importance. 2.27. It uses an S-curve, following an earlier graph- However, there were some differences among the ical presentation frequently used to illustrate the countries. For example, access to credit was more pattern of ICT developments in countries.10 A sim- important for Mexico than for other countries; con- ilar approach can be used concerning the develop- sulting on strategy and implementation was more ment of e-business: for SMEs, it is relatively easy to important for Costa Rica; and product compatibil- start using PCs, then connect to the Internet using ity was more important for Chile (chart 2.26). Small e-mail, and then set up a web page. However, the companies have greater needs for consultancy on introduction of the Internet into their business ICT business strategies and implementation, and activities (internal or external, including e-com- for financing ICTs. Services companies need greater merce) does not follow straightaway, and larger compatibility among products, improved connec- companies are more likely to automate their busi- tivity, and better hardware and software, in partic- ness processes (and to do so earlier) than smaller ular software meeting the needs of SMEs. These companies. could be customers for open-source software products, an increasing niche market in developing One explanation for this is that most SMEs have no countries (UNCTAD, 2003a). defined e-business strategy. Using e-mail for communicating with suppliers and customers, and E. Conclusions searching the Internet for business information have immediate, visible effects and are thus quickly adopted by companies. But putting in place more A surprisingly large number of SMEs in developing complex e-business systems, intranets or extranets, countries are connected to the Internet. The results and linking up with suppliers’ and customers’ com-

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 2: E-BUSINESS AND SMEs 53

Chart 2.27 E-Business development

puter systems, require not only technical know- countries with more or less equal (i.e. good) access how but also a solid analysis of the costs and bene- to ICTs or level of skills. fits implied by the necessary investments, and convincing arguments in favour of them. In other This could be explained by differences in the access words, SMEs need proof that e-business will benefit to and quality of connections; the use and availabil- them. Needless to say, expected benefits (or the ity of e-banking and credit cards; or the perception absence thereof) of ICT adoption also play an of security with respect to data privacy, virus important role, in particular as they relate to cost attacks and other legal uncertainties. Many of these savings/expenditures. differences directly correspond to the prevailing legal and regulatory frameworks related to telecom- The results from Latin America, as well as the sur- munications, banking and finance, as well as trust veys from other regions that were reviewed, in the legal system and enforcement of the law. showed that there are significant differences There may also be important local and cultural fac- among SMEs in different regions and countries tors influencing companies’ level of e-business with respect to the use of the Internet. For exam- usage. This is an area where little work has been car- ple, while mainly exporters in South Asia use the ried out, and thus requires further study. Internet, companies in Chile use it for domestic business, and in Europe it is mainly used at the While the Latin American survey did not cover regional level. In Asia, e-commerce sites/portals firms located in rural areas, it demonstrated clearly or e-marketplaces are irrelevant and have not the widespread availability of the Internet and PCs yielded any successes, while in Latin America (in in urban areas. This is a common pattern across the particular Costa Rica) a number of small firms use developing countries, and has been confirmed by them for e-commerce activities. Even in developed other studies. In urban areas, ICT use is fairly com- countries ICT take-up by businesses differs among mon, irrespective of the size of companies. But in

E-COMMERCE AND DEVELOPMENT REPORT 2004 54 CHAPTER 2: E-BUSINESS AND SMEs the rural areas of some developing countries, many essary. In particular, the link between integrating small enterprises do not even have computers yet. ICTs into certain internal business processes (e.g. automating supplier and customer relations) and The main perceived barrier for Internet uptake is labour productivity requires further micro-data very similar across companies from both devel- analysis based on available statistical data, includ- oped and developing countries. European, Latin ing data on ICT usage and labour productivity col- American, African and Asian firms (already using lected from various national business surveys. the Internet) reported that the lack of network security was the key problem, followed by slow The review of the e-business surveys showed how and unstable connections. An important finding difficult it is to make cross-country comparisons, from the studies is that for many companies the even on such simple indicators as Internet and e- main reason not to go online is not the lack of tech- mail use (is it used for communication, ordering or nical skills and capacity, since in most developing purchasing; how many employees have access, and countries, qualified personnel can be found, and how often?), or website presence in companies (is they are growing in number. Rather, the use of it the firm's own server or hosted by third-party ICTs depends on the capacity to manage the enter- providers?). Many surveys are conducted on an ad prise and on the level of education of the owner; hoc basis, responding to a specific demand by the examples from Asia and Africa (Nigeria) researchers, business associations or government showed that firms where owners had received departments. As a result, the data often do not pro- higher education and had management skills were vide a comparable and representative picture of more likely to use new technologies. ICT readiness and use. Such a picture would require the continuous collection of data through Results from developed country studies evaluating official statistical sources. Demand by policy mak- the impact of ICT on firm productivity have dem- ers is crucial to speeding up the production of ICT- onstrated that complementary investments in related statistics in developing countries. human capital (i.e. skills), new business strategies and processes and new organizational structures A few policy directions can be provided on the are necessary in order for companies to reap higher basis of the above observations. First of all, the benefits from the adoption of ICT. Companies assessment of e-business in SMEs demonstrated that invested in these factors were also more inten- that among the key barriers to Internet use are sive users of ICTs and the Internet. those related to connectivity (quality, speed, cost) and security concerns. These are clearly areas For SMEs in developing countries, affording these where Governments can and must take action. For complementary investments is more challenging. example, to get started, SMEs need access to relia- In those countries, it will take longer to see the ble, low-cost connections, where dial-up services impact of ICTs, even though many SMEs are are often sufficient. The reliability of the service is already Internet users. An important distinction important for maintaining customer relationships. that needs to be made is between low-intensive Therefore, and to bridge the urban–rural divide, users (computers, e-mail – at the lower end of the emphasis should be placed on providing universal S-curve) and high-intensive users (intranets, extran- good–quality basic access, provided by a number of ets, full integration of business processes – at the ISPs among which the enterprises can choose. Nat- upper end of the S-curve) and the related difference urally, this should be followed by high-speed con- in impact of ICTs on business performance. On nections to allow companies to move towards full the other hand, SMEs have an advantage in that integration of e-business. Second, trust in a legal they can implement strategic and organizational and regulatory environment supportive of the changes much more quickly (and at lower cost) Internet economy is essential to companies for than large companies. This flexibility should pro- engaging in e-business. Third, for SMEs to make vide them with a competitive ede when it comes to the leap from simple (and low-cost) Internet use, the adoption of e-business. such as e-mail and web search, to building e-business systems fully integrated with those of their The results of the Latin American and other sur- customers and suppliers requires additional invest- veys provide information on how ICTs are used in ments, and technical and managerial skills to plan SMEs. However, in order to evaluate the impact of and successfully implement an e-business strategy. ICT usage on business performance, further analy- These are clearly areas where public and private sis – including time-series analysis - would be nec- agencies can play a crucial role in support of SMEs.

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 2: E-BUSINESS AND SMEs 55

Annex I

Questionnaire on ICT usage and electronic commerce in SMEs

Modulo A: Información general sobre los sistemas TIC A1. ¿La empresa usa computadoras personales (PC),? (Filtro) Sí ç ir a A3 No ç ir a A1.1 A1.1. ¿Tiene pensado usar Computadoras dentro de los próximos Si No A1.1. 2años? A2. Aunque su empresa actualmente no usa computadoras, ¿usa el Sí Æ ir a A2.1. No Æ ir a E1 Internet en instalaciones externas? A2.1. ¿Dónde? (marcar todas las opciones que apliquen) Internet Café Casa ir a B2 Otros A3. ¿La empresa usa Internet? (Filtro) Si Æ ir a A4 No Æ ir a A3.1. A3.1. ¿Piensa usar el Internet dentro de los próximos 2 años? Si Æ ir a B13 No Æ ir a B13 A4. ¿La empresa usa lo siguiente? Si No E-mail Extranet1

Modulo B: Uso del Internet y de TIC B1. ¿Actualmente, cuál es su tipo de conexión al Internet? (Varias respuestas posibles) MODEM análogo (Línea telefónica estándar)

ISDN2 Conexiones fijas de menos de 2Mbps (xDSL, ADSL, SDSL, etc.)

Conexiones fijas de 2Mbps o más (Frame relay3,otroserviciodereddebandaancha) Conexión inalámbrica (satélite, teléfono celular, otros) Otro (especifique) No sabe B2. ¿Para cuáles de las siguientes actividades usa el Internet? (Varias respuestas posibles)

Correo electrónico Búsqueda de información Monitorear el mercado (por ejemplo precios) Comunicación con autoridades públicas Servicios bancarios y financieros Información sobre oportunidades de empleo (reclutamiento y búsqueda)

B3. ¿La empresa tiene un sitio web? (Filtro) Si Æ ir a B4 No Æ ir a B3-1 B3.1. ¿Tiene pensado establecer un sitio web en los próximos 2 años? Si Æ ir a B7 No Æ ir a B-7

B4. ¿Con cuáles funcionalidades cuenta el sitio web? (Varias respuestas posibles) Facilitar accesos a catálogos de productos, listas de precios, etcétera.

1 Una extensión segura a Internet que permite a usuarios externos acceder a (partes de) Intranet de la organización. 2 ISDN = Integrated Services Digital Network. Es un sistema digital para la transmisión rápida de datos a través de la línea telefónica (cables de cobre). 3 Servicio de transmisión de voz y datos a alta velocidad que permite la interconexión de redes de área local separadas geográficamente.

E-COMMERCE AND DEVELOPMENT REPORT 2004 56 CHAPTER 2: E-BUSINESS AND SMEs

Inquietudes / funciones de contacto con la empresa Soporte posventa Capacidad de proveer transacciones seguras (por ejemplo a través de “firewalls” o servidores seguros)

Integración con sistemas de Back End4 Otro (especifique) B5¿Existelaposibilidadparaquesusclientesdepaguenenlínea los productos? (E-Payment) Si No B6. ¿Qué porcentaje de sus clientes ha sido obtenido por Internet? % B7. ¿Su empresa entrega algún producto o servicio al 100% Si Æ ir a B7.1 Si Æ ir a B7.1 digital? B7.1. ¿Cuál? B8. ¿La empresa compró productos a través Si No No sabe de Internet en 2003? (Filtro) Mercado Virtual Æ ir a B10 ç ir a B11 B8.1. ¿Dónde? (Marketplace) Sitio Web de tercero B9. Porcentaje del total de compras en Internet % No sabe B10. ¿Con qué porcentaje de sus proveedores trabaja usted por Internet? % B11. ¿La empresa vendió productos a través Si No No sabe de Internet en 2003? (Filtro) Mercado Virtual Æ ir a B13 Æ ir a B13 B11.1. ¿Dónde? (Marketplace) Sitio Web de tercero Propio Sitio B12. Porcentaje del total de ventas % No sabe B13. ¿La empresa usa Intranet?5 Si Æ ir a B14 No Æ ir a D1 B14. ¿En su empresa se usan sistemas de computación (o digitales) para lo siguiente? Si No Gestión de la relación con los clientes

Gestión de la cadena de valor

Gestión de conocimiento Planeación de recursos de la empresa, inventario Utilización de aplicaciones directamente en Internet a través de un proveedor de servicios

Almacenamiento de (y acceso a) documentos Manejo de las horas de trabajo Entrenamiento o educación Contabilidad

Modulo C: Impacto del uso del Internet y de las TIC en la PYME Si No No sabe C1. ¿Actualmente, el uso de TIC en su empresa es importante? C1.1. ¿Será importante en los siguientes 2 años? C2. ¿Tener acceso al Internet es importante para su empresa?

4 Integración del sitio web con los sistemas de la empresa para el intercambio automático de información de negocios (por ejemplo, con los sistemas de contabilidad e inventario). 5 Una red de comunicación interna, usando el mismo protocolo que Internet.

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 2: E-BUSINESS AND SMEs 57

Si No No sabe

C3. ¿Tener un sitio web en Internet es importante para su empresa? C4. ¿Los procesos de la empresa han cambiado por el uso de TIC? C5. ¿La estructura de la empresa ha cambiado por el uso de TIC? C6. ¿El uso de TIC ha influido la relación con sus clientes? C7. ¿El uso de TIC ha influido la relación con sus proveedores? C8. ¿La oferta (productos y servicios) de su empresa ha cambiado por el uso de TIC? C9. ¿Está satisfecho con su actual uso de TIC? C10. ¿Cuánto invertirá en el uso de TIC en los próximos 2 años? Poco Mucho No sabe

Modulo D: Barreras y Necesidades en el uso del Internet y de las TIC en general

D1. En su opinión, ¿Cuánto influyen las siguientes barreras en el uso de las TIC en Poco Mucho No sabe su empresa? Costos de las TIC Softwaretieneunciclodevidamuycorto Oferta de las TIC no satisface las necesidades de la empresa El personal no tiene conocimientos suficientes

Difícil encontrar y reclutar personal calificado El personal es renuente al uso de las TIC Clientes / Proveedores no están listos para usar las TIC

Otro (especifique) D2. ¿Cuánto influyen las siguientes barreras en el uso del Internet en su empresa? Poco Mucho No sabe

Seguridad (por ejemplo virus)

Tecnología demasiado complicada Costos de desarrollo y mantenimiento demasiado altos Pérdidadetiempodetrabajoconnavegaciónirrelevante Costos altos de la comunicación (conectividad) Comunicación de los datos lenta o inestable Clientes no están preparados para el uso de Internet Otro (especifique)

D3. ¿Qué tan importante considera los siguientes factores para el uso de las TIC o Poco Mucho No sabe del Internet en general?

Capacitación del personal Consultoría en la estrategia e implementación Mejores (nuevos) productos de hardware y software Compatibilidad de diferentes productos Productos específicos para PYMEs (software) Mejor desempeño (velocidad, seguridad, etc.) de la conectividad Acceso a crédito para invertir en las TIC y el Internet Otro (especifique)

E-COMMERCE AND DEVELOPMENT REPORT 2004 58 CHAPTER 2: E-BUSINESS AND SMEs

Módulo E: Información de la Empresa6

E1. Nombre y Dirección de la empresa

E2. Actividad de la empresa7

E3. Nombre del Contacto (entrevistado)

E4.Cargoenlaempresa

E5. No. de empleados a finales de 2003

E6. Total volumen de venta (= turnover) en el 2003

6 Los datos que se preguntan en este módulo se encuentran en el GoldMine y por lo tanto las preguntas tienen carácter de confirmación. 7 Según definición debe de ser el dueño de la empresa, o el drector general, o el gerente general. Si no estos no están disponibles, el gerente de sistemas o el gerente de administración pueden responder a la encuesta.

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 2: E-BUSINESS AND SMEs 59

References

Asia Foundation (2003). Regional survey of SMEs' use of e-commerce in Indonesia, the Philippines, Sri Lanka and Thailand. See www.asiafoundation.org/ICT/surveys.html.

Canadian e-Business Initiative (CeBI) (2002). Net Impact Study Canada: The SME Experience. A preliminary report (November).

Chambers of Commerce of Ireland (2002). Chamber SME e-business survey 2002. See www.chambersireland.ie.

ECLAC (2004). Toward an information society measurement instrument for Latin America and the Caribbean: Get- ting started with census, household and business surveys. Preliminary report. Santiago, ECLAC.

Economist Intelligence Unit (EIU) (2004). The 2004 e-readiness rankings. Written in cooperation with the IBM Insti- tute for Business Value.

Eurostat (2004). E-commerce and the Internet in European Businesses (2002). Detailed tables. Brussels, Eurostat. See europa.eu.int/comm/enterprise/ict/studies/entr-ict-2002.pdf.

Goodridge P and Clayton T (2004). E-business and labour productivity in manufacturing and services. Economic Trends 609: 47-53.

Humphrey J, Mansell R, Paré D and Schmitz H (2004). E-commerce for Developing Countries: Expectations and Reality. IDS Bulletin, 35(1): 31–39.

International Institute for Information Technology (INIIT) (2002). The Ghana Scan-ICT Study. See web.idrc.ca/ uploads/user-S/10850645841 The_INIIT_SCAN-Report GHANA.doc.

International Trade Centre (ITC) (2004). Winning with the Web: Learning from Best Practice Cases in E-Trade. Geneva, ITC.

Lal K (2004). E-business and export behaviour: Evidence from Indian firms. World Development 32(3): 505–517.

MCIT (Ministry of Communications and Information Technology, Egypt) and infoDev (World Bank) (2003). SMEs’ readiness assessment for the apparel and home-textile industry. Preliminary report, December.

Ministère de l’Industrie, du Commerce et des Télécommunications, Department du Commerce et de l'Industrie du Royaume du Maroc (2003). Utilisation des technologies de l'information dans le secteur industriel. See www.mcinet.gov.ma/mciweb/Techinfo/pdf/Rapport.pdf.

OECD (2002). Measuring the Information Economy. Paris, OECD.

OECD (2003). ICT and Economic Growth. Evidence from OECD countries, industries and firms. Paris, OECD.

OECD (2004a). The Economic Impact of ICT. Measurement, evidence and implications. Paris, OECD.

OECD (2004b). ICT, E-Business and SMEs. Paper prepared for the 2nd OECD Conference of Ministers responsible for SMEs, Istanbul, Turkey, 3-5 June 2004.

Oyelaran-Oyeyinka B and Lal K (2004). Sectoral pattern of e-business adoption in developing countries. United Nations University Institute for New Technologies Discussion Paper Series No. 2004-7.

Scottish Enterprise (2003). Scottish e-Business Survey 2003. Review of findings. Presentation submitted to UNCTAD Expert Meeting on Measuring the Digital Economy, Geneva, 8–10 September 2003.

UNCTAD (2003a). E-Commerce and Development Report 2003. United Nations Publication, New York and Geneva.

UNCTAD (2003b). Use of the Internet for Efficient International Trade: Guide for SME Managers. Geneva, UNCTAD.

UNRISD (2002). The Impact of Internet on the operations of medium and large industrial enterprises. Paper by Phil- ippe Barry and Hamidou Diop. Geneva, UNRISD.

World Economic Forum (2004). Global Information Technology Report 2003-2004. Oxford University Press, New York.

E-COMMERCE AND DEVELOPMENT REPORT 2004 60 CHAPTER 2: E-BUSINESS AND SMEs

Notes

11. Early collectors of official statistics on ICT usage by enterprises include Australia, Canada, the Nordic countries, the United Kingdom and the United States.

12. These measurements exclude sectors such as financial services and travel and tourism.

13. Economist Intelligence Unit (2004) and World Economic Forum (2004).

14. For a detailed analysis of business process outsourcing and its potential for developing countries, see chapter 5 of the E-Commerce and Development Report 2003.

15. Asia Foundation (2003).

16. http://www.uneca.org/aisi/docs/SCANworkshop/ ICT%20PENETRATION%20AND%20USAGE%20IN%20ETHIOPIA2.ppt

17. Ministère de l'Industrie, du Commerce et des Télécommunications, Department du Commerce et de l'Industrie (2003).

18. See www.emarketer.com.

19. http://www.oecd.org/department/0,2688,en_2649_34449_1_1_1_1_1,00.html

10. Industry Canada has presented a graphical presentation of ICT developments in countries based on the S-curve in several of the documents of the OECD Working Party on Indicators for the Information Society (WPIIS). For further discussion, see for example chapter 1 of the E-Commerce and Development Report 2001.

E-COMMERCE AND DEVELOPMENT REPORT 2004 Chapter 3 THE CREATIVE INDUSTRY AND DIGITAL AND INTERNET TECHNOLOGIES: THE CASE OF MUSIC

Digital and Internet technologies and music are a allowing artists to assess what revenue mix (record- near-perfect match. In the past, technologies were ing, song writing, performing, etc.) and, accord- used to enable music to reach growing audiences ingly, what investments will maximize their and to assist artistic creativity. But it now seems income for a specific degree of artistic and commer- that developments have outdone themselves. Like cial freedom. More importantly, the capacities of a young adult who has discovered his or her power modern digital recording and production tech- of mind and body, music has run away from its nologies and the ability of the Internet to intro- guardians – the recording and publishing industries duce artists to an audience, distribute their music – and is cavorting with appreciative audiences on and provide a conduit for a more personal relation- the Internet’s peer-to-peer networks. The music ship are ground-breaking. Therefore, policy efforts industry has recognized that these developments in developing countries should focus on providing are foundational, and is adopting a dual approach maximum discovery of musicians and musical cul- for damage limitation until they play out with tures using the Internet and digital technologies greater clarity. The first approach is to argue for an and avoid generating anxieties about loosing out increase in the strength of copyright legislation and on possible, but actually improbable, stellar inter- enforcement by Governments and international national recording royalty earnings. Modern and treaties. The second is to develop a commercially functional systems for copyright protection and viable and legitimate alternative to the illegal but royalty collection are needed in developing coun- free downloading of copyrighted content. Despite tries in order to develop strong national markets as some early success in several for-pay music down- well as to interact with the international entertain- load portals, the creative and business power of the ment industry. However, artists may have a prefer- Internet will be greatly advanced when artists, ence for improved discovery over doubtful royal- industry and audiences discover how to commer- ties and therefore should consider retaining cialize peer-to-peer (p2p) file sharing. Solutions control over their music and using all Internet were found for other problematic technologies: technologies, including p2p file sharing and online FM radio, cassette tapes and video tape recorders. distribution. Why, therefore, should it be different now?

The main problem is that the opportunities offered A. Introduction by technology require a change in the business model for artists and industry alike. Changing business models is in itself a risky business. But the Information and communication technologies music industry is no stranger to risk taking. Indeed, (ICTs) and Internet technologies are having a pro- only 5 to 10 per cent of its releases achieve profita- found effect on the global production, distribution bility. On the other hand, investors and stock mar- and consumption of music as well as other audio- kets have not been kind to the music industry since visual entertainment. Stimulated by news of music the Internet bubble burst in early 2000 and this may piracy and file sharing, the debate and speculations not promote boldness or visionary exploits. about the outcome of this process have received a fair amount of attention in popular and profes- From the artists’ perspective, digital and Internet sional media. What will become increasingly technologies offer the possibility of greater inde- important is the fact that the Internet enables pendence and artistic control. The Internet can change in existing business models and music indus- provide access to information on the commercial try structures. Public reactions from mainstream mechanics of the mainstream music business, media groups have often been defensive. At the

61 62 CHAPTER 3: THE CREATIVE INDUSTRY AND DIGITAL AND INTERNET TECHNOLOGIES: THE CASE OF MUSIC

same time, however, all of them are working to find The chapter will begin with an outline of the glo- ways to embrace and profit from the technology. bal and regional music business, with illustrations from several developing countries. It will review The digitization of cultural industry products, the the traditional business model in order to assess increase in the access to and bandwidth of broad- what is really at risk for artists, given the unstop- band connections and the development of global pable invasion of Internet-based technologies. p2p file-sharing technologies are transforming This will be followed by an overview of techno- music recordings into public goods.1 In turn, p2p logical history and developments. The chapter technologies have fuelled the discussion about the will then examine why the Internet will change role, purpose and practicability of copyrights and the music business, and will discuss a number of the related legal remedies. Thus the development pioneering real-world examples that may initiate a of digital rights management (DRM) technologies broad process of re-engineering of existing busi- has assumed a prime position for the mainstream ness models. In general, the chapter will try to entertainment industries, as the realisation grows convey how technological progress, the nature of stronger that they may not be able to depend on the Internet and the change in the economic litigation, and the threat of litigation, to enforce parameters of the music industry are co-dependent presumed earnings. issues. Finally, the chapter will discuss the issue of intellectual property and its arch-enemy–piracy– and review non-restrictive or public licences and Music, film and literature are labour-intensive and open-source record companies as possible solu- talent-based creations. By decreasing entry costs tions and enablers of both content and technologi- and fixed outlays, digital and Internet technologies cal development. will enable an economic democratization of culture and creative industries. Therein lies the potential for developing countries’ creative workers and entertainment industry: using the Internet B. The international music they could enlarge their market and increase their industry earnings. However, there have been debates about the effects of globalization on cultural diversity and the possible role of the Internet in this pro- The global entertainment and media industry is cess. Being a disruptive technology, the Internet estimated to earn about 1 trillion dollars of reve- 2 presents both threats and opportunities. Those nue. Of this, the music industry generates about who are aware of the issues and have a strategic 35 billion dollars. Five “majors” currently domi- and positive approach will possibly improve their nate the global market for recorded music: Uni- fortune or, at least, fare better than the competi- versal Music Group; Sony; Warner Music Group; 3 tion. Developing countries and their creative Bertelsmann Music Group; and EMI. These com- industries need to be in the forefront of develop- panies are part of larger entertainment conglomer- ments. Any venture based on assumptions of a ates that produce content, software and hardware commercial and technological status quo will lead for entertainment. Estimates vary, but most to sunk costs and lost investment. accounts put the majors’ share of the global market for recorded music at between 75 and 80 per This chapter will discuss developments, and draw cent. Table 3.1 gives their annual sales figures for conclusions and make recommendations that may several recent years. However, size is not the same be useful for cultural sector and music industry as profitability and indeed, as noted earlier, mar- leaders in developing countries. It will describe kets and investors have not been too enthusiastic how the relationship between ICTs and music about the stocks of the majors’ parent companies. developed and the potential that technology Chart 3.1 indicates that, with the exception of Ber- brings to the production and distribution proc- telsmann, all have underperformed with regard to esses. It should encourage creative persons and the Dow Jones market index. companies to review their business and technology strategies and models, and will highlight The recording industry has had an international new commercial possibilities. In order to do this it dimension since its beginnings. The two early will review and perhaps question the commercial recording companies – the Gramophone Co. and and normative understanding of the music Victor – were both established by Emile Berliner,5 medium and its industry. the inventor of the flat disc phonogram, in 1898

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 3: THE CREATIVE INDUSTRY AND DIGITAL AND INTERNET TECHNOLOGIES: THE CASE OF MUSIC 63

Table 3.1 Annual sales of major recording industry companies (in millions of dollars)

2002 2001 2000 Sony Music 4830 4568 6 240 EMI Group Plc 3 487 3 785 3 799 Universal Music Group 6276 5811 6 224 Warner Music Group 4 205 4 036 4 148 BMG 2700 1446 4 548 Total 21 498 19 646 24 959 Source: Hoovers.com and UCTAD estimates.4 and 1901 respectively. Victor covered the Ameri- of the Thumri genre – a light classical style popu- cas, while the Gramophone Co. covered the lar in Northern India.6 United Kingdom, continental Europe and the British commonwealth, thus segmenting the inter- The Odeon label of International Talking Machine national market between them. The Gramophone Gmbh, Berlin, – established in 1904 and together Co. sent recording engineers across Europe to with the French Pathé Records the main com- “capture” performances from which records could petition to Victor and the Gramophone Co. – be made (Gronow and Saunio, 1998). Interna- pioneered similar explorations into the ethnic and tional talent was sought out and globally appeal- local music of the developing world. By the end of ing content was an important business proposi- its second year of business it claimed to have tion – for example, the signing and huge success of recorded over 10,000 titles in Arabic, Greek and Enrico Caruso by Victor, the repertoire of which Turkish. An important milestone was the signing consisted mostly of opera sung in Italian. The first of Salam Higazi, a very popular singer and often Indian recording by the Gramophone Co. was cited as the father of Egyptian stage music. What made 1902. Among the most successful Indian art- set Odeon apart was its business model. Odeon did ists was Gauhar Jan of Calcutta, a popular singer not establish branches overseas. Instead, it

Chart 3.1

Stocks prices of the “majors”, 2000-2004 Chart 3.2

Market for recorded music (2002, in millions of dollars, by region)

Source: Yahoo.com. Source: Pricewaterhousecoopers (2002).

E-COMMERCE AND DEVELOPMENT REPORT 2004 64 CHAPTER 3: THE CREATIVE INDUSTRY AND DIGITAL AND INTERNET TECHNOLOGIES: THE CASE OF MUSIC

Table 3.2 Music CD and music cassette (MC) sales volumes (in millions of units*)

CD CD MC CD+MC CD CD MC CD+MC 2003 2002 2003 2003 2003 2002 2003 2003 continued 1. United States 746 803 17 763 32. Denmark 10 12 0 10 2. United Kingdom 234 222 1 235 33. Finland 10 10 0 10 3. Japan 206 229 4 210 34. Saudi Arabia 0 0 7 7 4. Germany 147 179 16 163 35. Colombia 7 8 0 7 5. India 15 9 138 153 36. New Zealand 7 8 0 7 6. France 118 130 3 121 37. Greece 7 7 0 7 7. Russian Federation 30 18 85 115 38. Ireland 7 8 0 7 8. China 34 23 42 76 39. Chile 5 6 1 6 9. Brazil 58 80 0 58 40. Israel 6 4 0 6 10. Mexico 54 51 2 56 41. Malaysia 2 2 3 5 11. Spain 54 62 1 55 42. Philippines 3 3 2 5 12. Australia 53 49 0 53 43. Singapore 5 5 0 5 13. Canada 53 57 0 53 44. Hungary 3 3 2 5 14. Pakistan 2 1 36 38 45. United Arab Emirates 1 1 3 4 15. Indonesia 3 2 34 37 46. Czech Republic 3 3 1 4 16. Italy 36 37 1 37 47. Croatia 2 1 0 2 17. Turkey 11 5 25 36 48. Venezuela 1 2 0 1 18. Netherlands 25 28 0 25 49. Peru 1 0 0 1 19. Sweden 24 26 0 24 50. Ecuador 1 1 0 1 20. Thailand 9 10 14 23 21. Republic of Korea 16 21 4 20 51. Estonia 1 1 0 1 22. Switzerland 18 21 1 19 52. Iceland 1 1 0 1 23. South Africa 12 12 6 18 53. Slovakia 1 1 0 1 24. Ukraine 7 3 11 18 54. Slovenia 1 1 0 1 25. Belgium 16 18 0 16 Total 3126 2 252 466 2 602 26. Portugal 12 12 3 15 of which 27. Austria 14 15 0 14 Developed market economies 1830 1968 1882 28. Norway 13 15 0 13 in percentage 87.5 87.4 72.3 29. Poland 10 10 2 12 Developing countries and 30. Argentina 10 6 1 11 transition economy countries 306 284 720 31. Hong Kong 11 10 0 11 in percentage 14.3 12.6 27.7

* Values of zero indicate that fewer than 500,000 units were reported. All values have been rounded of to the nearest million. Source: IFPI (2004). appointed local agents whose task was to solicit large extent on the global marketing and success of artists, plan repertoire and then request technical Anglo-American popular music. Chart 3.2 shows recording services from Odeon in Berlin, which the regional distribution of the recorded music were consequently performed by a visiting engi- market. With the exception of the odd hit (e.g. neer. The master recordings would be shipped Valens’ La Bamba) or attempts at performing “for- back to Odeon in Berlin for finalization and repro- eign” material by mainstream artists (e.g. Martin duction. The records were then “re-exported” back singing Volare or Sinatra singing the Brazilian to their indigenous markets (Vernon, 1997). compositions of Carlos Jobim), it was only towards the end of the last century that the global Despite its cosmopolitan beginnings, the overall music market showed signs of renewed geographi- performance of the music industry depends to a cal diversification. Already in 1980 one third of

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 3: THE CREATIVE INDUSTRY AND DIGITAL AND INTERNET TECHNOLOGIES: THE CASE OF MUSIC 65

Table 3.3 25 Largest markets by CD sales volume in 2003 (in millions of units) 1. United States 746 16. Switzerland 18 2. United Kingdom 234 17. Republic of Korea 16 3. Japan 206 18. Belgium 16 4. Germany 147 19. India 15 5. France 118 20. Austria 14 6. Brazil 58 21. Norway 13 7. Mexico 54 22. South Africa 12 8. Spain 54 23. Portugal 12 9. Australia 53 24. Turkey 11 10. Canada 53 25. Argentina 10 11. China* 45 12. Italy 36 Total 2020 13. Russian Federation 30 of which 14. Netherlands 25 Developing and transition economy countries 251 15. Sweden 24 in percentage 12.4

* Figures for China include those of Hong Kong (China). Source: IFPI (2004). Warner Music’s revenues came from non-United music cassette media in those countries, often sur- States artists, increasing to more than half by the passing CD sales in large multiples. Not all music mid-1990s.7 Similarly, EMI earns significant reve- is an internationally tradable item and creating nues from foreign artists and embraces a number local content may not require the sizeable invest- of foreign labels, such as Electrola (Germany), ments typical of mainstream productions in devel- Path Orient and ChinaCo (China), GramCo oped markets. In 1999, two thirds of total music (India) and Colombia Nipponophone (Japan). In sales were not traded internationally, but pro- the same vein, Polygram — the former Philips/ duced and consumed locally. National sales of Siemens music business now part of the Universal locally produced music range from 40 per cent in Group — attributed half of its revenues to non- Europe to, unsurprisingly, since it is the world’s Anglo-American popular music production and largest producer and market, over 90 per cent in had in the past set up factories in Egypt, Nigeria the United States. Latin America and Asia fall and Brazil.8 Until the 1970s the music industry somewhere between these figures, while for Africa transnationals were largely based in the United the figure is below one third. International Federa- States, with the exception of Philips/Polygram. tion of Phonogram Industries (IFPI) data released The 1980s saw the entry of Japanese interests in 2001 indicated that the share of recordings by (Sony and Matsushita) and European corporations local artists signed to local music labels rose from (Bertelsmann and Vivendi). 58 to 68 per cent of sales between 1991 and 2000. The growth in local music spanned all regions, except Africa and the Middle East. The following Tables 3.2 and 3.3 give figures for music CD and country discussions will serve to better illustrate cassette sales in countries that have total reported issues and concerns specific to the music industry sales above one million units. In terms of unit sales in developing countries. volume, developing countries and transition economies account for about 14 per cent of the global market for recorded music. When sales are India has a music market worth $144 million and measured in retail value expressed in dollars, is the largest developing country market in terms developing countries represent only 6.7 per cent of unit volumes. It has been successful in establish- of global commerce. Adding the transition econo- ing a close link between music and its enormous mies brings this up to 8 per cent. An important film industry: film music accounts for over 70 per reason for the difference between the volume and cent of the total music market. The Indian Music value figures is the significant sales of low-cost Industry (IMI) organization has over 50 members,

E-COMMERCE AND DEVELOPMENT REPORT 2004 66 CHAPTER 3: THE CREATIVE INDUSTRY AND DIGITAL AND INTERNET TECHNOLOGIES: THE CASE OF MUSIC including local branches of the majors. The distri- million in value. While cassettes have been the big- bution system for cassettes, and CDs and vinyl gest problem in the past, CD piracy has sharply records remains anarchic and piracy is a major caught up.11 concern. The IMI claims that India is the world’s largest pirate market in terms of unit volumes and In the Philippines there are 39 companies affiliated sixth in terms of value. Music cassette sales out- with the Philippine Association of Recording number CD sales eight times. A large export mar- Companies (PARI) and several independents. ket created by Indians living abroad has begun to Data collected from PARI show peak sales of 11.8 emerge and Indian producers need to explore the million units in 1997, declining to 5.6 million in full range of possibilities for tapping this potential. 2003. Piracy is rampant and contraband media This may be an important impetus for assessing represents 25 to 50 per cent of the market. Popu- the possibilities of digital technologies and e-com- lar music from the West had a 60 per cent market merce for music, and an obvious one when consid- share in 1996, and much of the locally generated ering the apparent success of “offshore” portals 35 per cent was music imitative of or derived from such as the UK-based Audiorec.co.uk. internationally successful reportoire.12

In 2003 Brazil was the ninth largest market for It is interesting to note that a number of histori- recorded music in terms of unit volumes, repre- cally significant national entertainment industries senting a retail value of $309 million. It employs and musical “hot-spots” have all but disappeared an estimated 8,000 people directly, and a further from the global market. The five majors were all 55,000 indirectly in the retail trade, publishing and present in the Nigerian market that generated radio broadcasting. It has built a strong local rep- sales of 20 million units in 1993. However, a com- ertoire that has grown to 79 per cent of sales in bination of political and economic instability, 2001, up from just under 60 per cent a decade ear- physical piracy, and the resulting departure of the 9 lier. However, the five majors control most of majors by the mid-1990s, caused unit sales to drop the local market. Nonetheless, the Som Livre and to 8 million by 1996. Today, piracy is estimated to Music Abril labels, owned by the large Brazilian account for 85 per cent of total of sales. This cable television and broadband ISP Net Serviços moved the business to many smaller labels with de Comunicação and multimedia company Grupo more limited resources, making the enforcement Abril respectively, managed to enter the top ten of copyright and other contractual arrangements best selling-music rankings in 2000 and 2001 with difficult, and thereby reducing possibilities for a combined four titles per year. Like India, Brazil Nigerian artists wishing to enter the international has significant piracy problems and, according to market.13 Another opportunity missed because of IFPI, globally ranks as the third most pirated mar- economic and political strife is the music of the ket, only behind China and the Russian Federa- Congo region. Congolese music, widely popular 10 tion. Given the size of the domestic market, the internationally, resulted from a mix of traditional local music portal iMusica, discussed in greater music and Cuban styles, in particular rumbas, detail in section G, has been offering for-pay brought “back” on 78 rpm records produced by downloads for several years. HMV. In 1955 the Congolese market was purchasing 600,000 records a year and this increased to 1 South Africa is the largest African music market, million by 1970. However, after several decades of generating combined CD and cassette media sales economic downturn and civil war, many of its volumes of 18 millions units, valued at about $160 best musicians have emigrated and local purchas- million in retail sales. Sales of music cassettes rep- ing power is inadequate to support a significant resent one third. Unlike in Brazil or India, most recording industry, in spite of a population of 55 14 sales come from international titles. In 2000, the million. Association of the South African Music Industry (RISA) categorized 62 per cent of all units sold as Jamaica is another example of a successful musical “international”. This, however, represented a milieu with an underdeveloped national market. retail value of 77 per cent. RISA’s membership In spite of the global success of its artists, whose consists of more than 50 businesses and includes international sales are worth anywhere between the international majors. Piracy is an important $1 and $2 billion, the local market managed to problem and estimates place it at between 40 and generate sales of only $5.5 million and move 45 per cent of the market in units, or around $65 barely 0.5 million CDs, music cassettes and vinyl

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 3: THE CREATIVE INDUSTRY AND DIGITAL AND INTERNET TECHNOLOGIES: THE CASE OF MUSIC 67 records in 2002.15 Since the 1990s, several initia- of royalties owed. Typically, no royalties are paid tives have been launched by Jamaican agencies and before the full advance is recovered. If the record regional and international bodies, such as does not sell and the advance recovery fails, the UNCTAD, WIPO and CARICOM, to support artists’ debt will be rolled over to the next CD, as the growth of the music industry and in particular specified under the contract. to strengthen the enforcement of copyright. How- ever, such efforts have not succeeded in securing Recording royalties for newcomers are usually 9 the involvement and trust of the musicians, per- to 13 per cent of the retail price of a full-length formers, producers and record labels.16 In 2003 the CD (Krasilovsky, Shemel and Gross, 2003; Rapa- Recording Industry Association of Jamaica was port, 2003; Hesmondhalgh, 2003, citing Caves, founded, in what will hopefully be a more fruitful 2000). After a number of deductions and adjust- effort to grow the domestic market in line with ments, artists’ recording royalties are closer to 4 the international success of its music. per cent or $0.66 per CD sold. Box 3.1 and table 3.4 describe some elements of this process. C. The business of music Whether an artist can generate net royalty revenue may not be precisely related to the revenue of the record company. Given different assumptions Today, musicians have a choice between dealing and on the basis of the terms agreed in the con- with the traditional recording industry, and man- tract outlining responsibilities and amounts to be aging their own business in a way that would spent in production and promotion, an artist may require profoundly embracing Internet technolo- earn net royalties while the record company may gies. In order to deal with this dilemma, it is useful not manage a profit on the artist. The opposite is to consider the mainstream options from a finan- also possible (case C), where the company earns a cial perspective. The following discussion owes substantial sum, but the artist is left on the verge much to Krasilovsky, Shemel and Gross (2003) of debt, eventually “saved” by song-writing royal- and the numerical examples are provided in order ties but still left with many expenses to cover. It is to follow industry practice in the United States, it also important to remember that a record com- being the largest market and the one in which pany's profits on the overall talent portfolio may many musicians, including those from developing vary either because of poor sales or because of countries, hope to achieve success. It should be more mundane financial or management issues noted that more favourable contractual terms and that can affect any business or industry. Earned greater paying rights, reflecting smaller overall income will need to cover management and sales volumes, may be offered to musicians in administration costs, as well as losses from less other developed countries. successful releases.

For royalties to materialize, a composition is usually recorded and published: two separate and dis- The figures in table 3.4 indicate that under certain tinct activities. In practice, an artist may perform conditions artists may not have a financial interest on a recording, may be the composer, or both. in recording “expensive” projects. The notion of Two different contracts govern these activities: investing in high-quality production and promo- recording contracts and publishing contracts. tion to ensure the success of a CD – case D – may be, however, more financially purposeful for the Recording artists’ royalties are paid in return for record company while mainly appealing to a sense recording music under a “work for hire” record- of self-value, accomplishment or genuine interest ing contract. Such contracts transfer the copy- of artists in working in a top-notch production rights of the recording from the artists to the environment. Thus, establishing realistic expecta- record company, in return for the payment of tions about an artist’s particular mix of revenue royalties. The record company will also pay a sep- streams from recording, song writing or perform- arate royalty to the composer in order to acquire ing concerts can be a difficult exercise. Recording the “mechanical right” to reproduce the composi- may not be a financially satisfying and secure tion.17 On signing, a type of credit is provided to strategy, in particular if the “artist” is a group or artists in the form of an advance that is recovera- ensemble and monies are split many ways, espe- ble from artists’ royalties. The record company cially if the CD will not turn “gold” in the United earns all income from the sales of the CD in excess States.

E-COMMERCE AND DEVELOPMENT REPORT 2004 68 CHAPTER 3: THE CREATIVE INDUSTRY AND DIGITAL AND INTERNET TECHNOLOGIES: THE CASE OF MUSIC

Table 3.4 Theoretical cost breakdown of artists’ and record companies’ income: Four cases (in millions of dollars)

Case A Case B Case C Case D 35% no-sale Full sale of Enhanced quality Going for gold reserve distribution full sales 500,000 copies % $ % $ % $ % $ 1. Retail price of CD 100.00 16.00 100.00 16.00 100.00 16.00 100.00 16.00 2. Recording artist royalty 12.00 1.92 12.00 1.92 12.00 1.92 12.00 1.92 3. - Producer royalty 3.00 0.48 3.00 0.48 3.00 0.48 3.00 0.48 4. Net recording artist royalty 9.00 1.44 9.00 1.44 9.00 1.44 9.00 1.44 5. - Cost of packaging 17.50 0.25 17.50 0.25 17.50 0.25 17.50 0.25 6. Sub-total 7.43 1.19 7.43 1.19 7.43 1.19 7.43 1.19 7. - Deduction for free goods 15.00 0.18 15.00 0.18 15.00 0.18 15.00 0.18 8. Sub-total 6.31 1.01 6.31 1.01 6.31 1.01 6.31 1.01 9. - Reserve against returns 35.00 0.35 0.00 0.00 0.00 0.00 0.00 0.00 10. Sub-total 4.10 0.66 6.31 1.01 6.31 1.01 6.31 1.01 11. Royalty income on 250,000 CDs 4.10 164 093 6.31 252 450 6.31 252 450 6.31 504 900 12. - Recovery of recording advance 100 000 100 000 250 000 350 000 13. Net recording royalty income before expenses 64 093 152 450 2 450 154 900 14. Net mechanical rights royalty for songwriting 48 750 75 000 75 000 150 000 at 50% of $0.60 per CD (paid through publisher) 15. Management fees (10% of advance) 10 000 10 000 25 000 50 000 16. Legal fees 10 000 10 000 10 000 20 000 17. Promotional activities (10% of 26+27) 15 000 15 000 30 000 60 000 18. Total artist royalty income 77 843 192 450 12 450 174 900

19. Wholesale price of CD (50% discount) 8 8 8 8 20. Record company distribution of 250,000 CDs 2 000 000 2 000 000 2 000 000 4 000 000 21. - Manufacturing and distribution at $3 per CD 750 000 750 000 750 000 1 000 000 22. - Recording royalties payable less advance 64 093 152 450 2 450 154 900 23. - Mechanical rights royalties paid to publisher 97 500 97 500 97 500 300 000 24. - Free goods 300 000 300 000 300 000 600 000 25. - Reserve against returns (deduction in case A) 700 000 0 0 0 26. - Production of promotional video 100 000 100 000 200 000 400 000 27. - Promotional activities 50 000 50 000 100 000 200 000 Sub-total 21 through 27 2 061 593 1 449 950 1 449 950 3 154 900 28. Total record company income -61 593 550 050 550 050 1 345 100 29. Total publishing company income 48 750 48 750 48 750 150 000 30. Total music industry income -12 843 598 800 598 800 1 495 100

The theoretical sales figure of 250,000 should be put requirements of the Irish or South African ratings, in perspective with national recording industry or the fact that most Indian sales are of low-cost cas- rankings. Table 3.5 presents an overview of rank- settes, we realize that international artists and ings in several developed and developing country music industries need to be rigorous in matching markets. It is clear that generating revenue from their production and marketing investments to the sales of technically high-quality recordings requires market. Given these risky economics, musicians, an international outreach. Perhaps only the United especially those from developing countries not tar- States’ markets can absorb sufficient numbers of geting the mainstream Anglo-American market, units and generate large enough revenue streams to may accordingly adjust their financial expectations motivate investment by artists and industry in about international recording ambitions and con- recording for profit. Considering the limited tracts and can seek other revenue streams.

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 3: THE CREATIVE INDUSTRY AND DIGITAL AND INTERNET TECHNOLOGIES: THE CASE OF MUSIC 69

Box 3.118 Recording music: Who earns what?

Looking at case A in table 3.4, we start upbeat with a 12 per cent royalty on a $16 CD. The producer will earn a flat fee as well as a producer’s royalty, typically 3 per cent, of the absolute royalty. Then, from the remaining 9 per cent, there is a 10 per cent to 25 per cent “cost of packaging” deducted, which leaves the artist on average 7.43 per cent. The justification is that the royalty should be based on the recording and not on the sales appeal added by the packaging. In return, the record company typically absorbs all the costs of artwork and packaging. The next deduction of, on average, 15 per cent is for “free goods” and this leaves the artist with 6.31 per cent. Free goods are records given away to retailers in order to enhance promotional campaigns and enable sales or special discounts for a limited period. Retailers are also entitled to return unsold CD stocks, and artists are not paid any royalty for these. To make a provision for such returns, record companies hold back a percentage of royalties, say 35 per cent, leaving the artist with a 4.10 per cent royalty or $0.66 per printed and distributed CD. While technical costs and facilities have become less expensive with improvements in digital recording technologies, substantial sums can be spent on human skills needed to produce a professional product. These may be various engineering skills, arranging skills and the skills of session musicians. Record companies may express or prescribe preferences for a sophisticated (and costly) recording and production environment in order to ensure an even and commercially viable product, eventually reducing the leeway that artists may have in managing the disbursement of their advance. Sometimes one part of the advance may be used exclusively for recording and will be placed in a special recording fund. A professional recording and master ready for CD reproduction can easily cost $100,000. Thus the artist will need to convince the record company to print and distribute at least 250,000 copies of a CD in order to generate an income of $64,093 before management, legal and promotion expense are deducted. If the artist is also the composer, he or she may receive additional royalties in accordance with the mechanical rights contract. If the CD does not sell much over 140,000 copies, the artist-cum-songwriter is indebted to the company and will try to make good with the next recording, supported by a new advance. Revenue from the new CD will go to returning all outstanding advances, including those from past projects under the same contract. The figures and relative proportions in table 3.4 should not be taken to represent any real-world average. Readers may replace figures and generate their own worst- or best-case scenarios. The calculations assume that the artists compose and arrange their own material. They also assume a 50 per cent commission on songwriting royalties (lines 20 and 29). Publishing royalties in the table are fixed at $0.60, as is the practice in the United States; other markets may offer different or better terms and conditions. Royalties for public performance and broadcast are not included since the conventions on these vary from country to country. Not all costs on the artists' side are included as they may vary as well. These may be costs of subsistence, equipment, training or hiring of additional arrangers and musicians during recording. Costs of manufacturing (line 21) at $3 per CD become overstated with larger quantities and may drop to $2 or less (line 21, case D). Artists' costs for promotional activities (line 17) can also vary greatly as either a proportional or fixed contribution to the overall budget activities (line 27) and are subject to negotiation. The overall promotion budget size (17+26+27) can vary during the life cycle of a CD, with potentially ambiguous results for both artists and companies. The record company may impose other deductions on artists, such as those for breakage of CDs in shipment and for the risk of using new technologies. Budgets for promotion can be as much as 20 per cent of wholesale revenue (line 20) for productions with popular commercial potential. Depending on the negotiating power of the artists, all, some or none of these will be recovered from artists’ royalties. If the total promotional costs in case D were to be split half-half between the artist and the record company, the artist would incur a net loss of $95,100 while the music industry income would rise to $1,765,100.

If the recording artists are also the original authors also discourage artists wishing to retain copyrights (composers) of their music they may seek to earn and ownership of their material by offering less from the sales of sheet music, broadcast, third advantageous mechanical rights contracts for party performance, synchronization (e.g. use in recording self-written material, usually referred to films or advertisements) and re-recording (i.e. as “controlled compositions”. cover versions) of their works.19 In order to realize this, artists need to assign their interests as A lack of a dependable licence-collecting infra- songwriters, through a publisher, to a licence-col- structure can be a sufficient motive for artists in lecting organization, which would then be entitled developing countries to leave their home countries to collect the corresponding royalties. The pub- and re-establish themselves abroad. Musicians will lisher may be an affiliate of the record company, also emigrate to seek the most traditional and his- an independent publisher or a company owned by torically oldest revenue stream: giving for-pay the artist. Even from a superficial glance, it is obvi- concerts. Concerts can still have revenue potential ous that the interaction between the different for artists whose music need not compromise its recording and publishing interests can lead to a expression in order to fit into current trends and variety of tensions and situations. The record musical fashions. While the need to give concerts company may naturally prefer to have the artist may be a forgone conclusion for musicians in publish with its own affiliated publisher. It may developed countries, it can indeed be a problem

E-COMMERCE AND DEVELOPMENT REPORT 2004 70 CHAPTER 3: THE CREATIVE INDUSTRY AND DIGITAL AND INTERNET TECHNOLOGIES: THE CASE OF MUSIC

Table 3.5 can be ultimately decisive for artists’ discovery. How many sales for a hit record? But it is the Internet and its associated technologies, which will be discussed in greater detail in part E, that promise vastly improved possibilities Gold Platinum for artists to approach and establish a more inti- United States 500 000 1 000 000 mate relationship with their audiences. In compar- Germany 150 000 300 000 ison with radio or music television, using the United Kingdom* 100 000 300 000 Internet is affordable and accessible for many artists. The Web allows artistic control and expres- France 100 000 300 000 sion. It also permits audiences to conduct their dis- Japan 100 000 250 000 covery experience in their own time and at their ** India 100 000 200 000 own pace, unforced by radio and television pro- Brazil 50 000 125 000 gramme scheduling. However, it is not a trouble- Australia 35 000 70 000 free zone as the Internet is not necessarily a public South Africa 25 000 50 000 domain and its components, ranging from the Argentina 20 000 40 000 domain name to the content files, can become cor- Ireland 7500 10 000 porate property through recording or publishing contracts. * Includes only full-priced vinyl, cassette and CD sales. Mi-priced and budget media need to sell double this quantity for the same rating. ** Does not include film soundtracks. D. The development of music technology for developing country artists owing to various restrictions on travel and labour regulations. Tem- The objectives of applying technology to music porary work visas in developed markets are have remained the same over centuries and apply granted to commercially successful, internation- equally to digital technologies and the Internet. ally renowned or culturally significant perform- The first objective is to improve the physical and ers. However, this may not extend to supporting creative interaction between musicians and their staff such as technicians, management or even creative medium. The second is to increase out- accompanying musicians or family, if these are reach and discovery, and improve the musical not an established element of the group or ensem- experience of the audience.23 The following 20 ble performance. Thus permanent emigration is discussion explains how music moved to the dig- seen as a neater solution. Developing countries ital medium incrementally and in a purposeful may have a policy preference to keep as many art- way, intertwined with the evolution of very ists living and creating at home, while performing closely related information and communication internationally, rather than emigrating altogether. technologies. At the level of international trade policy, performing music abroad falls under “mode four” of the Modern music technology started to develop with General Agreement on Trade in Services, whereby the broad deployment of electrical power.24 But it services are agreed to be provided “through was the invention of the phonogram by Edison in presence of natural persons of a Member in the 1877 and its successor, the gramophone, by Ber- territory of any other Member”21 Governments of liner in 1884, and radio technology by Marconi developing countries may choose to promote the and Tesla in the 1890s that pushed music into fun- fullest liberalization of “mode four”, in particular damental and irreversible technological develop- when confronted with monolithic requests for full ment. These had two important consequences. liberalization of trade in creative and cultural The first is that they achieved a spatial and tempo- goods or delivery through commercial presence.22 ral dissociation of artist and audience. The second is that they helped improve outreach. Coinciden- The financial success of concerts and touring tally, both also relied on the crucial invention in depends on the ability of audiences to “discover” 1907 of the vacuum tube, the predecessor of the the artists and their music, and on enticing them modern-day transistor, which allowed the amplifi- into attending. Music discovery was traditionally cation of minute electrical signals received on done by radio as well as through music societies radios or played on gramophones, as well as the and fan clubs. Today, music television channels development of modern-day computers. Valve

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 3: THE CREATIVE INDUSTRY AND DIGITAL AND INTERNET TECHNOLOGIES: THE CASE OF MUSIC 71 and transistor technology allowed fewer musicians technically accomplished results, with the Beatles’ to play to larger settings and audiences than previ- Sgt. Pepper’s Lonely Hearts Club Band and Jimi Hen- ously possible, through the development and use drix’s Electric Ladyland being frequently cited as of vocal and instrument amplification. Together pioneering works embracing these new technolo- with radio, these developments changed the com- gies. Another development that used multitrack mercial parameters of the music business. Con- recording technology to dislocate space and time, as certs in large venues in urban areas, where popular well as purpose, was Zappa’s pioneering of xeno- interest could be better satisfied, became a reality. chrony, whereby unrelated instrument perform- Sales of phonograms became an important source ances from different musical compositions are of revenue. Finally, by airing phonograms, radio taken out of their original context and reassembled stations no longer required the physical presence into new compositions.27 of performing artists in their live studios and greatly diversified their broadcast content. Electronic instruments, or synthesizers as they are commonly called, used technology derived from Continued innovation led to several important electronic analogue computers and laboratory test technologies prior to the digital revolution. In equipment.28 Their creative purpose was twofold. fact, the controversial “rip, mix and burn” market- The first was to produce purely synthesized tim- ing of Apple, which some interpreted as promot- bres that did not resemble or copy real-world 25 ing piracy, or equally Burton’s disruptive Grey sounds. The second was to imitate common instru- 26 Album music have an established ancestry. ments in order to provide cheaper and more man- Apple and Burton are distinctive in that they ageable music production, the idea being that an democratize the underlying technology and its accomplished organ or piano player playing a syn- use, and challenge our notions of what is fair and thesizer with acceptable string or organ sounds acceptable in creative activity, but they are not could resolve the logistical or physical variables foundational. and problems of organizing a string ensemble or accessing a church organ. While many, if not most, The critical music technologies in the second half synthesizers were developed to be “generalists”, of the twentieth century were magnetic tape and each model eventually had its own “sound” and idi- multi-track recording, followed by the develop- osyncrasies. This led, again, to ergonomic compli- ment and commercialization of electronic instru- cations and prompted the entry of the first digital ments. Recording on magnetic tape enabled the technology devised specially for music: MIDI. emergence of musique concrète. Also known as electro-acoustics, it consisted of music produced The MIDI (Musical Instrument Digital Interface) from editing together tape-recorded fragments of standard was launched in 1983 and was developed natural and industrial sounds. Pioneered by by a group of leading synthesizer manufacturers. Schaeffer in the late 1940s and 1950s, it was the Its initial objective was to enable musicians to link first music that exclusively used technology as a different synthesizers together and play all of creative medium. them using only one keyboard. To do so, it set out a communications standard and a physical inter- Multitrack recording, whereby several separate per- face standard. An immediate benefit was the devel- formances of any number of instruments or voices opment of sequencers in the form of dedicated playing the same composition can be recorded in hardware or as computer software. Sequencers perfect synchronization on separate “tracks”, and generate music on a synthesizer by sending it a later mixed to achieve a desired “soundscape”, dra- stream of MIDI instructions, each instruction matically changed the approach to musical compo- defining the pitch, duration and timbre of a note sition and production. AMPEX Co. and Les Paul, or a group of notes to be played, in a timed an accomplished pop, jazz and country guitarist, sequence. These sequences can then be saved as a introduced the first multitrack recorders in 1954. computer file. Sequencers enabled the pre-pro- An important effect was, again, the temporal and gramming and computerized performance of com- spatial dissociation of musicians, some of whom plex musical passages. They also enabled the end- would never meet in person yet would be perform- less editing and rearrangement of a particular ing “together” on the final product. While creative performance. MIDI song files are small and porta- critique sometimes finds fault with this approach ble, and thus were not restricted by modest com- (Théberge, 1989) it has permitted well-crafted and puter chip or disk memory capacity.

E-COMMERCE AND DEVELOPMENT REPORT 2004 72 CHAPTER 3: THE CREATIVE INDUSTRY AND DIGITAL AND INTERNET TECHNOLOGIES: THE CASE OF MUSIC

The next important musical technology develop- nological decentralization of the Internet inevita- ments were digital sampling and the closely bly leads to greater empowerment of users and a related development of the music compact disc, reduction of possibilities for control and manage- or “CD” as it is commonly known. The music ment of information flows and content. Because CD was introduced in 1980 by Sony and Philips the music industry has relied on the imperfections and mass production was underway after 1982. and inefficiencies of carrier media and distribution The original sampling synthesizer was the Fair- technologies to add value, control processes and light CMI, which was first available in 1979. generate revenue, it has not welcomed the Both inventions rely on sampling: the process of progress and popularity of p2p applications. converting, in the case of music, sound into digital information and, on playback, back into 29 To digress, most technology developments have sound. found important use in the processes of music creation, distribution and consumption, often satisfy- This transformation of music into digital infor- ing diverse and different needs of artists, industry mation, through MIDI but more so through and audiences. For musicians, spatial and temporal sampling and music CDs, enabled its conver- dissociations may reach new heights with collabo- gence with personal computer technology. On rations made possible by transmitting sound files the recording technology side, sampling and using the Internet and generating joint perform- MIDI merged into computer software that today ances using the conduit of cyberspace. As the handles both pre-programmed and sampled renowned producer and artist Wyclef Jean human performances in the same musical compo- explained, “We’re in the hard disk Pro Tools gen- sition. In a further spatial and temporal detach- eration now…you can be in Tennessee and I can ment, computer-based recording has achieved be in New York, and if you get an idea you can non-linear and non-destructive editing. Particu- play the part and email it to me and I can add to it lar musical fragments can now be moved around and send it back to you. I do that with Missy [Elli- or duplicated in time with seemingly endless pos- ott] all the time.” 31 sibilities of undoing, just like the cut-copy-and- paste functions used in any word processor to For the music industry, the Internet has also gen- edit and finalize a text. erated an enormous potential for outreach and marketing. Most technologies have enabled The treatment of music as “files”, using personal freedoms by reducing the restrictions of time and computers with CD drives and specialized soft- space for these same processes. The social role of 30 ware for ripping, editing and re-recording music may also be changing as technologies sup- music, has enabled audiences to manage their lis- port individual experience while reducing oppor- tening experience with improved interactivity. tunities for human interaction and collective cul- The development of compression techniques, such tural gratification. What few clearly expected was as mp3, that reduce music CD file sizes by 90 per the effect of the rapid development and simultane- cent and the development of user-friendly soft- ous deployment of the broadband Internet and ware and of high-capacity portable music devices, p2p networks. The next part of the chapter will such as the iPod or Nomad, have led to an increase discuss the disruptive effects of the Internet and in audiences owning their listening experience, the threats and opportunities presented to the removing the limitations of the original medium – music business. for example, the compact disc or radio – regarding how and when music is enjoyed. E. Internet, music and change Finally, p2p technologies and the growth of broadband Internet connectivity have generated a broad range of responses from audiences, artists The disruptive nature of the Internet and Web and industry. p2p allows every connected compu- technologies can be best appreciated by comparing ter, even one with a simple telephone dial-up, to the structure of the traditional music business become a node and a server. Some would argue with that of the Internet. What we see today is the that this is essentially a fulfilment of the original process of music exploring ways to use the Inter- technological objective of the Internet. This tech- net and assimilating and incorporating certain characteristics. Charts 3.3, 3.4 and 3.5 describe

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 3: THE CREATIVE INDUSTRY AND DIGITAL AND INTERNET TECHNOLOGIES: THE CASE OF MUSIC 73

Chart 3.3 Music industry structure and processes

some basic structures and establish links between or genres, or even other types of experience or processes that are central to change. entertainment, such as film, sport and other hob- bies, learning or recreational activities. Looking at the bottom of chart 3.3 we can recognize the modes in which consumers engage with Finally, the experience of physical performance of music as an art and entertainment, as well as chan- music is a fundamental mode of engagement that, nels used by artists to deliver, interact with the while sometimes enhanced by digital technologies, audience and establish feedback. The most com- offers the human interaction and artist–audience monplace mode, ever since the mass commerciali- feedback that is missing from, say, listening to a zation of the gramophone, has been the acquisi- compact disc or surfing the Web. Performance tion and enjoyment of physical media, most often offers an opportunity for musicians to directly gen- in the form of a music CD and to a decreasing erate revenue, either by playing for an audience or extent of cassette tapes and vinyl records. by playing as hired musicians in recording studios. Performance-based revenue is crucially important when we recognize that the recording industry Another important mode is that of discovery. manages profitability on only 5 to 10 per cent of its The quantitative disproportion between availa- portfolio, a fact which indicates that the majority ble music and a person’s capacity to select and of actually signed artists cannot count on earnings appreciate it has already reached an immeasura- from CD sales. Any revenue achieved from selling ble magnitude. The freedb.org database of music compact discs is typically used to pay back CDs, an open database maintained by users and advances as described in part C of this chapter. published under the General Public License,32 33 alone lists more than 1.3 million titles. The It is also important to recognize that music has an online retailer Amazon.com offers several mil- important social role in all cultures and that its lion book, music and film titles in various media. accessibility to collective appreciation is an impor- Thus the process and capacity for discovery are tant element of its popularity and universality. crucial for establishing an artist and securing con- Whereas collective experience in the past was only sumers’ financial preferences vis-à-vis other artists possible during a performance, Internet and digital

E-COMMERCE AND DEVELOPMENT REPORT 2004 74 CHAPTER 3: THE CREATIVE INDUSTRY AND DIGITAL AND INTERNET TECHNOLOGIES: THE CASE OF MUSIC technologies enable a near-collective experience They also offer genre-based portals and guidance through online communities (discovery) and file for consumers as well as the possibility for indi- sharing (media). The three modes of physical viduals to construct their own portal of critical media, live performance and discovery do not appraisal and recommendations. Another technol- have clear boundaries. Indeed, it is easy to see how ogy used as a marketing-discovery aid is the track- performance can be a discovery experience for ing of browsing behaviour and the analysis of pur- consumers, or talent hunters from the recording chase patterns of consumers. On the basis of such industry. It is also debatable whether for-pay intelligence, online retailers try to second-guess download services, such as iTunes or Napster, are and promote artists to individual consumers by e- used to obtain content or are made for discovery mail or during a browsing session. Dedicated artist that may eventually lead to the purchase of a com- websites have also emerged and their role is pact disc or a concert ticket. mainly to engage in distribution and marketing activities within the framework of traditional Looking again at chart 3.3 we find a fairly intact industry structures. A number of notable excep- traditional music industry that has seen some tions are described in section F. adoption of Internet technologies. It still relies heavily on distribution through retail, and marketing discovery through broadcast channels. The Traditionally, most of the technology for produc- most obvious advance is in e-commerce retail, tion and distribution of music is owned and man- where music compact discs are sold online and aged by the established business of recording, mar- delivered by postal mail or courier. E-commerce keting and distribution and therefore, historically, retailers frequently offer previews in the form of most of the innovation – such as FM Radio short and low-quality audio downloads, editorial (invented by RCA) or the music compact disc and reviews and discussion and appraisal forums for cassette tape (developed by Sony and Philips, and amateurs and fans in order to assist discovery. Philips) – occurred in this locus as well. What is not

Chart 3.4 The layered structure of the Internet

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 3: THE CREATIVE INDUSTRY AND DIGITAL AND INTERNET TECHNOLOGIES: THE CASE OF MUSIC 75 so obvious is that any process that pushes produc- the network. There are no real obstacles in devel- tion and distribution technology out to the ends of oping a new web browser or establishing a new the system, to artists and consumers, can under- website, as far as the physical network and data mine traditional structures and business models. transport layer are concerned. Chart 3.4 describes the Internet and allows some insight into its radical concept and nature. The The Internet still has two broad classes of comput- future structure of the music industry will be a ers. There are those that are used only for brows- result of the interaction of the Internet and the tra- ing and are typically linked through a telephone ditional industry, and a brief appreciation of the dial-up, DSL or cable ISP service. Then, there are Internet’s design is fundamental to gaining an those that are servers that store and hand out web- insight about possible changes in the near and sites to browsers. But two new technologies are medium term. blurring this distinction. The first is the availability of always-on flat-fee broadband connections The defining characteristic of the Internet is its for subscribers. Matched with a fixed IP number, freedom. It realizes this through a layered struc- such computers become de facto servers. Peer-to- ture, the openness of the Transmission Control peer technologies for file sharing (Kazaa, Mor- Protocol and the Internet Protocol software (often pheus, Overnet) or telephony (Skype) are capable abbreviated as TCP/IP), its end-to-end environ- of converting even a modest home PC with a dial- ment for applications and content and its domi- up Internet connection into a server, albeit a mod- nant open and free application – namely, the est one. Because of the end-to-end nature of the World Wide Web (Benkler, 2000; Lessig, 2001; Internet, such p2p applications are developed and Solum and Chung, 2003). The layered construc- run irrespective of the technology of the lower tion is established in such a way that innovation layers. Beyond the policy and control of the own- and improvements in any layer do not require ers of the computers and the contract conditions adaptive responses in any other layer to maintain with their Internet service provider (ISP), there is existing functionality. Adaptation is considered little in the network itself that can be used to tech- only from the point of view of taking advantage of nically restrict or control applications and the improved environment to provide better func- content. tionality, content or service. Thus, a change in the Internet protocol – for example, the deployment These technical and conceptual freedoms and of IPv6 – will not require a rewriting of websites. openness are the driving forces of much of the Similarly, the development of a new web browser information revolution of the past ten years. does not affect the functionality of the TCP with Indeed, who would have invested in developing regard to how it manages data packets. A new e-commerce storefronts or media player applica- optic fibre cable in the Indian Ocean will not tions tied down by technical or legal restrictions require any change in the content of websites or enforced by optic fibre operators or hardware the html standard. The TCP/IP software that producers? Information systems based on closed manages data transfer and the physical network technologies, such as non-Web services provided that carries the data do not “know” what these by CompuServe or Prodigy, have disappeared data mean. In order to “sniff out” data, an agency and open and free technologies are gaining favour may need to establish a user or a host and develop in all fields that are touched by the Internet.35 applications running on computers above and connecting through the TCP/IP layer. Cementing The question is, how will this affect the music its openness, the TCP/IP software and its source industry and how quickly will changes come code are in the public domain, while the HTML about? The assumption is that the fundamental code of many websites is accessible through a nature of the Internet will not change in the browser.34 medium term. This is an issue in itself – it is related to the increasingly important discussion on Most critically, the end-to-end nature means that Internet governance and cannot be done justice in applications and content are developed, installed this chapter. Chart 3.5 speculates by exaggerating and run on computers that are on the perimeter of certain established trends. The first obvious the network. The consequence is that new tech- change is that the unidirectional production and nologies for users and hosts – or by analogy, con- flows described in chart 3.3 will cease as artists, sumers and artists – can be developed regardless of consumers and industry become increasingly net-

E-COMMERCE AND DEVELOPMENT REPORT 2004 76 CHAPTER 3: THE CREATIVE INDUSTRY AND DIGITAL AND INTERNET TECHNOLOGIES: THE CASE OF MUSIC

Chart 3.5 Music industry affected by the Internet

worked through Internet technologies. The sec- marketing devices and e-commerce capabilities. ond is that the functions of production, distribu- Many such websites have developed to the point tion and marketing in chart 3.3 will “become” where the online activity they generate can be applications, more neutral and less subject to the called an artist–audience “relationship”. More- uncertainties of the interaction between artists and over, many artist websites have become the prime business. Thus, technology moves out from the locus of their interaction with the public, circum- industry and becomes the shared property of all venting traditional marketing and broadcasting who wish to participate in music, creatively and support provided by the music industry, the commercially. p2p technologies will become inter- amount depending on perceived commercial nalized as some form of contract and compensa- potential. tion mechanism evolves to legalize and accommo- date file sharing of copyrighted content. Matching The most discussed disruptive application has this development, we see an expansion of the pro- been that of file sharing using peer-to-peer tech- duction of derivative works by fans. While digital nologies. File sharing is an excellent example of derivation remains a legally dubious activity, and a the capacities for innovation provided by the end- plainly illegal one if derivative compositions con- to-end and layered characteristics of the Internet. tain recognizable samples and are publicly redis- In combination with the development of software tributed, it is technically achievable with off-the- for extracting files from CDs and DVDs, file shar- shelf software and computer hardware. Another ing has prompted the music industry to research new type of content is the development of greater into digital rights management (DRM) technolo- interactivity at artist websites, including various gies that technically restrict the use of digital

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 3: THE CREATIVE INDUSTRY AND DIGITAL AND INTERNET TECHNOLOGIES: THE CASE OF MUSIC 77 media and invest in litigation. However, the music The mainstream recording industry indicates that industry has scaled down its efforts to litigate setting up legitimate for-pay online music portals against p2p technology providers following a is a significantly more complex task than design- defeat in the court case against Grokster and ing a peer-to-peer protocol and designing the cli- Streamcast, and has turned to litigation against ent program to be installed on a user’s compu- individuals who have violated copyrights and ter.41 A recent industry publication describes licences by redistributing music without permis- several elements that need to be in place before sion.36, 37 However, suing customers may not be a Internet distribution can achieve the required lev- sustainable business model. Because companies els of service and quality. The first issue is the have a different strategic relationship with clients need for a large digital catalogue: consumers will than they do with competitors, suing clients may be disappointed with limited content. The second not generate positive public opinion and could is the need for high-performance Internet infra- alienate potential consumers.38 Developing com- structure. The third issue is supplying safe and mercial and technical solutions that support Inter- virus-free files, and a fourth one is providing net-based distribution may ultimately present bet- secure payment systems. The fifth issue is the ter value for artists, audiences and industry. development of a consumer-friendly digital rights Specific cases of Internet applications are discussed management system. Finally, the greatest problem in the next section in order to highlight possibili- is clearing recordings and compositions with vari- ties and current practice. ous copyright holders. Suffice it to say that, with the partial exception of the last two issues, none of these considerations are novel or specific to music. F. Technologies and applications Indeed, finding a good balance between DRM and consumer utility, since these are practically opposite notions, requires wisdom and experience. The history of technology adoption in music is However, clearing rights should not be a problem one of artists and their audience using computers for an industry where a few companies and their and the Internet to enhance, share and thus popu- affiliates own the majority of recording and pub- larize their creativity, and of the reactions by the lishing rights. mainstream industry to limit any perceived or potential damage. The controversies that we see The discussion that follows will review several today over p2p file sharing have precedents in the technologies and portals. The first – free soft- disputes about radio, in particular FM radio, and 39,40 ware – has been at the root of many of the copy- video-cassette recording (VCR) technologies. right issues to be discussed in section G. Two of While it may be exaggerated to accuse the music these – Napster and MP3.com – have suffered a industry of luddism, especially since much of heavy legal onslaught from the music industry. today’s recording and distribution technology was While they may regain prominence in the near developed by the industry, which continues to future, their nature will bear little resemblance refine it, the technology it did develop in the past to their original incarnations. The third – was either financially inaccessible to individuals or Apples’s iTunes Music Store – has got off to a restricted through regulation. Not everyone could good start, in part because its Chief Executive run a radio station, while duplication of video- Officer (CEO), Steve Jobs, has managed to estab- tapes and vinyl records required substantial invest- lish communication with the mainstream music ment. In contrast, just about any individual in the industry, being a media insider as CEO of Pixar, developed world, and many in developing coun- the hugely successful animation company. An tries, can establish a website offering musical con- insightful development is the Brazilian down- tent that is produced on a personal computer at a load portal iMusica. It clearly demonstrates that technically acceptable level. Computers and the music and Internet distribution are not the pro- Internet have changed the economics, and artists prietary domain of developed markets.42 File- and audiences are enjoying unseen technological sharing technologies such as Kazaa, Morpheus or freedoms. Empowerment often has something to Wippit will also be briefly considered. The dis- do with rights, and copyrights and permissions are cussion will then review several interesting direc- foundational elements of the music industry and tions taken by individual artists in embracing will be examined in section G. Internet technologies and engaging their audi-

E-COMMERCE AND DEVELOPMENT REPORT 2004 78 CHAPTER 3: THE CREATIVE INDUSTRY AND DIGITAL AND INTERNET TECHNOLOGIES: THE CASE OF MUSIC ences with media, discovery and performance. opment of the highly efficient MPEG-1/2 Audio Several Internet portals dedicated to promoting Layer 3 file compression technology, more com- unsigned or undiscovered talent as well as opera- monly known as mp3. tions with a business-to-business profile will also be reviewed. The original Napster had two components. The first was the client software that was installed on 43 users’ computers. The client allowed people to dis- 1. Free and open source applications cover and download music. The second was a centralized database that provided information about A number of digital technologies used in record- which songs could be found on what computer ing and production are functionally independent and the links for downloading them. In this sense, of the Internet. Most of these technologies are, Napster was not a pure peer-to-peer application. unlike the Internet, proprietary. This means that their source code is secret and their use is subject It became very popular for several reasons. It to licences and copyrights. However, a number of allowed the general public to obtain music online new software applications for use in music have without having to purchase an entire compact disc been developed as free and open source software of songs, the majority of which generated little (FOSS) – software that does not hide its code and interest or attention. It allowed users to discover whose licence permits redistribution, copying and music with greater insight than with the very short sharing of improved or altered source code. Box and low-fidelity sound clips sometimes provided 3.2 describes several applications that can be freely by online retailers. Napster enabled users to share used, but also altered and adapted to local lan- unofficial and unreleased recordings and deepen guage, needs or user habits. As with any instru- their insight of the creativity of their favoured art- ment, the output of these programs will depend ist. Finally, Napster was an application developed on the creativity and inspiration of the artist. by exploiting the end-to-end nature of the Internet. Indeed, some of these programs may not yet pro- All that was necessary was for users to install the vide all the functionality as the proprietary indus- software on the computers they used for browsing try-standard applications. However, from a didac- the Web. Neither the physical network nor the tic perspective, they are well placed for use in transport functions of the Internet needed to make educational institutions dedicated to music and any technical adjustments or allocate permissions computer science at all levels. Experience in crea- as they could not discern between data packets of tive use or programming can be fed back into web pages or song files. improving these programs. Finally, the skills acquired by using any one of these programs is Not surprisingly, the Recording Industry Associa- highly relevant and transportable if the opportu- tion of America (RIAA) – an association of major nity arises to work in a mainstream music indus- recording companies – filed a class action suit try technological environment. FOSS programs against Napster on 7 December 1999.45 The legal may have particular value for developing coun- process that followed generated many headlines tries as they allow localization and, given their and eventually gave Napster a great deal of public- affordability, can be tried by aspiring or estab- ity. It is estimated that Napster use peaked in Feb- lished artists or “tech-savvy” amateurs without ruary 2001.46 their having to invest significant means, beyond their own time and effort.44 The United States courts eventually ruled that the principal activity of Napster was related to copy- 2. Napster right violation and its servers were ordered to be shut down in July 2001. After this Napster continued efforts to re-establish itself as a subscription- The first major disruptive Internet technology to based music service but failed and went into bank- affect the music industry was Napster. Today, ruptcy during acquisition negotiations with Ber- Napster is a legitimate for-pay music download telsmann AG. portal that bears little resemblance to its initial incarnation. First released in May 1999, Napster What made Napster legally vulnerable was its was created by Shawn Fanning as a file-sharing incomplete reliance on peer-to-peer technologies. service. Its initial success was enabled by the Because it used centralized servers to carry search- growth of Internet connectivity and by the devel- able information and links to song files, it became

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 3: THE CREATIVE INDUSTRY AND DIGITAL AND INTERNET TECHNOLOGIES: THE CASE OF MUSIC 79

Box 3.2 Free and open source software for music

An increasing number of free or open source software applications are available for making and listening to music. Most of them run on the GNU/Linux operating system. Some have been released in versions that will run in Microsoft Windows or Apple’s MacOS. The following list is illustrative and not comprehensive. For a detailed assessment, readers should consult http://sourceforge.net or http://freshmeat.net/, as well as the specialized web page http://linux-sound.org/ . A qualified review of several advanced programs for professional recording can be found in the February 2003 volume of the Sound on Sound music trade magazine.i Product descriptions are taken directly from the project websites with minimum edits and their accuracy cannot be guaranteed. Agnula The main task of Agnula (a GNU/Linux audio distribution) is the development of two reference distributions for the GNU/Linux operating system completely based on free software and completely devoted to professional and consumer audio applications and multimedia development. One distribution will be Debian-based (DeMuDi) and the other will be Red Hat-based (ReHMuDi). The European Commission originally funded the Agnula project.ii After the end of the funded period, Agnula will be continuing as a volunteer-based free software project. Operating system: GNU/Linux; website: http://www.agnula.org/ Rosegarden Rosegarden is a professional audio and MIDI sequencer, score editor, and general-purpose music composition and editing environment. It is an easy-to-learn, attractive application that runs on Linux, ideal for composers, musicians, music students, and small studio or home recording environments. It is currently in a beta release phase, in preparation for a full 1.0 release later in 2004. Operating system: GNU/Linux; website: http://www.rosegardenmusic.com/ Audacity Audacity is a free audio editor. It can record sounds, play sounds, import and export WAV, AIFF, Ogg Vorbis and mp3 files. It can edit sounds using Cut, Copy and Paste (with unlimited Undo), mix tracks together, or apply effects to recordings. Audacity is written in C and C++, using the wxWidgets cross-platform toolkit. Operating system: GNU/Linux, Windows, MacOS; website: http://audacity.sourceforge.net/ Ardour Ardour is a digital audio workstation. It can record, edit and mix multi-track audio. It is used to produce CDs, mix video soundtracks and experiment with new ideas about music and sound. Ardour capabilities include multichannel recording, non-linear, non-destructive editing with unlimited undo/redo, full automation support, a mixer whose capabilities rival high-end hardware consoles, and sound effects. Operating system: GNU/Linux; website: http://ardour.org/ JAMin JAMin stands for “JACK Audio Connection Kit Audio Mastering interface”. JAMin is designed to perform professional audio mastering of stereo sound recordings. Mastering means preparing a recording for mass reproduction and is a critical and final phase in the production process. Operating system: GNU/Linux; website: http://jamin.sourceforge.net/ Sweep Sweep is a multi-channel audio file editor with a difference. A virtual stylus, replacing the ubiquitous cursor, allows users to scrub through a file and reach an exact place in a song to make an edit. The virtual stylus has been programmed to mimic the performance of a real turntable, thus enabling its use in production as well as for live DJ performance. Sweep was developed with support from Pixar, the animated film studio that produced Toy Story and Finding Nemo, and the Australian Commonwealth Scientific and Industrial Research Organisation. Operating system: GNU/Linux, NetBSD Sun/Solaris; website: http://www.metadecks.org/software/sweep/index.html Mixxx Mixxx provides access and playback of Ogg Vorbis, mp3 and wave files for a live DJ performance. Sounds can be edited for pitch and a beat track and automatic tempo synchronization facilitates mixing in correct beat and rhythm. Filters, a crossfader, and speed controls are provided. Operating system: GNU/Linux, Windows, MacOS; Website: http://mixxx.sourceforge.net/ CDex CDex is a tool focused on ripping and converting music from CDs into an mp3 files for storage on a PC hard drive. It has built in support for many mp3 encoders and provides numerous options for managing media files. Curiously for free software, it is available only for use under Windows. Operating system: Windows; Website: http://cdexos.sourceforge.net/ Grip Grip is a CD player and CD ripper for the Gnome desktop. It has the ripping capabilities of the program cdparanoia built-in, but can also use external rippers. It also provides an automated frontend for a variety of encoders in order to transform ripped files into MP3s or other compressed formats. Internet disc lookups are supported for retrieving track information from disc database servers. Grip works with DigitalDJ to provide a unified “computerized” version of one's music collection. Operating system: GNU/Linux, FreeBSD, Sun/Solaris; with GNOME; website: http://nostatic.org/grip/ i See http://www.soundonsound.com/sos/feb03/articles/linuxaudio.asp. ii See http://www.agnula.org/documentation/project_documentation/AGNULA_ec/view.

E-COMMERCE AND DEVELOPMENT REPORT 2004 80 CHAPTER 3: THE CREATIVE INDUSTRY AND DIGITAL AND INTERNET TECHNOLOGIES: THE CASE OF MUSIC a straightforward target for the recording industry provided to artists included hosting, charts defined and arguably an accomplice in the crime of copy- by genre and geographical area, as well as statisti- right violation. This particular insight was well cal data indicating which of their songs were more taken by the recording industry, which may have popular. There was no charge for downloading started anticipating that future file-sharing systems independent artists’ music and revenue was gener- would very likely be based on pure peer-to-peer ated through online advertisements. technologies.47 Thus, on 25 June 2003, the RIAA announced that it would file civil lawsuits against To implement this scheme, MP3.com needed to individual computer users for engaging in illegal have its own set of CDs to copy and transfer to users’ file sharing, instead of pursuing peer-to-peer soft- folders. Requiring users to themselves rip and ware developers. upload entire CDs was seen as a technically unnecessary complication. Furthermore, MP3.com Today, Napster is owned by Roxio Inc., which is assumed that such copying would fall under users’ well known for the development of popular soft- “fair use” provisions of copyright law. On 22 Janu- ware for copying and burning compact discs on ary 2000, several days after the my.mp3.com service personal computers, and the reinvented for-pay was launched, the RIAA and the major recording Napster music download portal may make a good companies sued MP3.com for copyright infringe- match for its existing business. The new portal has ment, claiming that the electronic copies on been in operation since 9 October 2003, and had MP3.com’s servers were in fact subject to licensing generated 5 million downloads and attracted obligations. roughly 1.5 million subscribers by the end of Feb- ruary 2004. While impressive at first glance, these MP3.com quickly settled with all the plaintiffs figures are modest in comparison with Apple except Universal/Vivendi, with which a settle- Computer's iTunes Music Store. ment was reached only nine months later after a court ruled that MP3.com had intentionally vio- 49 3. MP3.com lated copyrights. In a peculiar developemnt, one year later Vivendi bought MP3.com in order to boost its online music activities and then pro- Not to be confused with the file compression tech- ceeded to sue for malpractice the lawyers that nology, MP3.com was set up in 1998 by Michael 48 were originally advising MP3.com on their Robertson, who later founded LindowsOS – a my.mp3.com scheme and defence. Having little user-friendly open source operating system success with developing online activities, in directly competing with Microsoft Windows – and November 2003 Vivendi sold the MP3.com SIPphone, an Internet telephony technology. domain and technology to the CNET media company. However, the archive of independent music, The website addressed the needs of both audiences containing more than a million songs by 250,000 and artists. With regard to audiences, it allowed artists, was to be deleted on 2 December 2003.50, 51 anyone to download songs from its server pro- Fortunately, the GarageBand and Trusonic portals vided that users could prove that they had the have acquired a legitimate copy of the archive and required rights and permissions because they are asking former MP3.com independent artists to owned a physical and legal copy. To do this, a user visit www.MP3isBack.com and recover their would put a CD in his or her computer drive. The music and regenerate their artist web pages.52 details of the CD were then sent to MP3.com and validated as “owned” after which a personalized online folder with songs from that CD was set up. 4. iTunes Music Store With a password the user could listen to the songs from anywhere on the Internet. Therefore, The iTunes Music Store, a for-pay music down- MP3.com was not giving anything that the user load service set up by Apple Computer, was intro- did not have in the first place. duced on 28 April 2003. In its first year of operation it had 70 million downloads at 99 cents a By giving users access to their own content, and piece from a catalogue of 700,000 songs from all by inspecting this content, MP3.com was able to major music companies and over 450 independent discover their preferences. This information was music labels. Generally viewed as a success, initial then used to promote the music of independent sales were limited to United States residents hold- musicians associated with MP3.com. The services ing credit cards.53 This was followed up with a

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 3: THE CREATIVE INDUSTRY AND DIGITAL AND INTERNET TECHNOLOGIES: THE CASE OF MUSIC 81 solid European debut on 15 June 2004, achieving listed on the São Paulo stock exchange. It carries 800,000 downloads during the first week. Follow- the largest online selection of Brazilian music and ing its successful launch in Europe, in line with its provides links to software for playback, creating “rip, mix and burn” credo, users can save songs to play lists and burning CDs. iMusica carries more an unlimited number of compact discs or iPod than 60,000 song titles. Its technology also powers devices after download, although there are some the MSN Brazil, Musical MPB and Ameri- restrictions on duplicating entire playlists.54 canas.com music download portals. iMusica has licence agreements with EMI, BMG, Abril Music The success of the iTunes Music Store, in spite of and Som Livre among others. Downloads cost the availability of free music files on p2p file-sharing about 0.99 Reals per song title (about $0.33) and networks such as Kazaa or Overnet, has surprised are provided in Microsoft Windows Media Audio many. We can speculate as to the reasons, some of (WMA) format, but not in mp3 because it does which are certainly a large catalogue and high-qual- not incorporate DRM technology to control cop- ity song sample previews. The iTunes website is well yright; therefore, iMusica uses Microsoft’s DRM 7 designed and the interface for downloading and pur- technology as well.57 Further, iMusica asserts that chasing songs is straightforward, in particular when WMA files have superior audio quality compared compared to the daunting technology of certain p2p with mp3 files of the same size. Once down- clients. Furthermore, songs are encoded and repro- loaded, songs will not play on other computers. duced with an advanced compression technology However, songs can be burned to CD for repro- (MPEG-4 and QuickTime 6) that some consider duction on players that support the WMA format. superior to standard MP3 quality.55 Other features, such as lightweight restrictions on copying and one- 6. Peer-to-peer networks click purchasing, are seen as an advantage. However, none of these are likely to remain unmatched by other online services. Thus the success of iTunes p2p programmes have become the focus of discon- Music Store has to be linked to other issues. tent among copyright-based industries and have been accused of being the cause and enabler of One of those issues has to be the winning linkage content piracy. While file sharing of copyrighted between the iPod personal media player hardware content beyond provisions for fair use is illegal in and the music download service, from both a tech- most countries, producing the software that nological and a business perspective. It has been sug- allows file sharing, redistributing it and installing gested that Apple may be tolerating losses on iTunes it on a personal computer are not. The major in order to support its best-selling iPod hardware.56 alleged effect has been the decrease in income The other issue is related to tapping into the almost from CD sales of record companies, and conse- captive Apple market. For many years, Apple users quently a decrease in royalty payments to record- have been paying premium prices for technology ing artists. Given that less than 10 per cent of that has an implied higher functionality and better recording artists manage to generate a profit for user interface. The legendary relationship of trust their record companies and the majority are prob- between Apple and its devotees indicates that audi- ably not earning any significant income for them- ences are prepared to pay if their needs can be selves either, it is interesting to ask whether they 58 addressed with a well-designed and quality product. should really be worried. Indeed, a number of Indeed, it is entirely possible to crack the residual artists have expressed a range of levels of accept- copy protection on tunes sold by Apple and disrupt ance, from simple tolerance to encouraging the the system. However, there is no evidence that this sharing of content that is purely of interest to is done to any substantial extent. As mentioned devoted fans, such as concert performances. A list before, an important advantage for Apple has been of such artists has been posted on the Electronic 59 securing the cooperation of the mainstream music Frontier Federation website. industry, no doubt through experience and capacities developed through its media sibling Pixar. While Napster was the original file-sharing program, Kazaa is today probably the most popular. 5. iMusica Brazil The Kazaa client is installed on a personal computer and uses the FastTrack protocol, as do Grokster and iMesh – two other client applica- iMusica Brazil was launched in July 2000 by tions – to access content on all computers access- Ideiasnet, the first Brazilian technology company ing the peer network running on FastTrack at that

E-COMMERCE AND DEVELOPMENT REPORT 2004 82 CHAPTER 3: THE CREATIVE INDUSTRY AND DIGITAL AND INTERNET TECHNOLOGIES: THE CASE OF MUSIC moment. Niklas Zennström and Janus Friis devel- matter of choice. Unlike the networks described, oped the FastTrack protocol in 2001. Sharman the Wippit music portal aims to create a subscrip- Networks bought Kazaa in January 2002 and has tion-based p2p network consisting of legitimately continued developing the program for the Micro- licensed recordings. Downloads can be achieved soft Windows operating system. Users prefer per song starting at $0.49. Unlimited downloads Kazaa mainly because it is the application with the are available for monthly ($22.99) or yearly largest installed user base. At any given moment ($89.99) subscriptions. Wippit has a wide range of there are several million users online. musical styles and formats, including mobile phone ring tones. Its catalogue includes more than Gnutella is more a project than just another p2p 200 record labels, including EMI and BMG. Using application. Originally developed for AOL, it was the Wippit p2p client, subscribers can search for abandoned when management realized its disrup- music by artist name, song title, album name, tive potential.60 It too used the FastTrack protocol track number, genre or year. Wippit uses a central but eventually developed its own protocol, which registry allowing only material that is recognized is maintained and advanced by the Gnutella devel- as legitimate to be swapped. opers forum. The original Gnutella was supposed to be released under a free software licence, hence p2p applications are improving and growing in the “GNU” in the name. Today, a significant part number daily, and it is difficult to see what can of the Gnutella project is open source, including a stop them, beyond a dramatic reconfiguration of number of clients (Limewire, Shareaza, Gnucleus). the Internet and its protocols. In a sense, p2p is a Morpheus is a p2p client that can search all the near-final step to the goal of eradicating any differ- major file-sharing networks and connect with ence between browser-only computers and server- users of Kazaa, iMesh, eDonkey, Overnet, computers, and turning the Internet into a truly Grokster, Gnutella, LimeWire and G2. It also ena- flat network without hierarchy. This is its destiny bles VoIP voice-chat among users and utilizes pub- by design. Thus, the media and music industry are lic proxy networks for privacy protection. faced with the option of exploring how to change their business model to embrace and profit from While most p2p applications require a user to sign p2p or to seek ways to uproot and change the up and provide some personal details, and can Internet. Public advocacy groups, such as the Elec- reveal these if needed, FreeNet, WinMX and tronic Frontier Federation are suggesting volun- WinNY are p2p applications that offer a certain tary collective licensing schemes: in exchange for a degree of anonymity to users. This has attracted subscription fee, file-sharing music fans will be left both criticism and praise from various political, free to download whatever they like, using what- economic and moral positions. ever software works best for them, with positive effects on earnings for copyright owners, innovation and improvement of Internet applications In contrast, the goal of the BitTorrent p2p system 61 is to provide efficient file-sharing to a large group and growth of the global online music catalogue. of people by having everybody that downloads a Finally, there has been speculation that free p2p file also upload it to others. To achieve this, a networks may go the way of free ISPs – for relia- small file with a “.torrent” extension is placed on a ble quality and service many consumers have cho- website or distributed by e-mail. The torrent file sen to subscribe to broadband Internet providers. contains information for the downloading and assembly of the file as it is received from many different computers. Thus a download will benefit 7. Individual artists and technology from a combined bandwidth of all uploading computers. Unlike in the case of FreeNet, WinMY Artistic expression is often personal, or sometimes and WinNY, the fact that the torrent files are reflects interactions of several defined individuals. placed online reveals the identity of the computer. The experience of music is deeply personal as well, Also, BitTorrent does not offer a search facility to although it has important social roles in many cul- find files by name. tures. Thus it can be no surprise that fans will- ingly flock to artists’ websites, hoping to “disinter- p2p networks, like the Internet on which they mediate” their experience by establishing at least a run, do not distinguish between copyrighted, free- virtual relationship with their favourites. Artists, and-open or public domain material. But this is a as discussed earlier in the chapter, are no strangers

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 3: THE CREATIVE INDUSTRY AND DIGITAL AND INTERNET TECHNOLOGIES: THE CASE OF MUSIC 83 to technology and sometimes manage to develop a provide current news and information. The band distinctive online presence beyond the generic members and management can be contacted indi- boxed and tabbed e-commerce or corporate por- vidually by e-mail from the contact page. tals of the mainstream music business. The key issue for every artist portal is to provide a proper In 2003 Marillion asked their audience to alter, balance of media, discovery and performance modes. Unfortunately, websites of independent edit and remix the music from their Anorakno- but established artists from developing countries phobia CD. In return, it offered for pay an are nearly non-existent, and those that have unmixed version of the album in which the world-class functionality, such the websites of instrument and vocal recordings for each song Salif Keita and Anjelique Kidjo, are set up and had been separated, allowing users to recombine managed by their record companies – Universal them and thus produce alternative versions. The and Sony in these two cases. most successful reconstructions were issued on a CD in July 2004 and the selected contributors Marillion.com received a prize of £500 per song. Marillion have managed to strike a different balance in their rela- Being described as “the least cool band in the tionship with their audience, which in some ways world – or the best-kept secret in the music indus- reduces and in other ways increases their control try”62 may, at first glance, not provide much lever- over their art. Much of it has to do with em- age for stardom. What it did provide, however, powerment assisted by digital and Internet tech- was release from the restrictions of the standard nologies. This approach has recently led to their contracts and business processes of the traditional first top 10 chart success since 1987.63 music industry. After their contract with EMI ran out in 1996, Marillion formed their own label and embarked on developing an intimate relationship Mash-ups with their audience, often through the clever use of digital and Internet technologies. While the Creative intervention on established works using website can be analysed at length for content and digital editing technology is becoming a popular complexity, it is far more interesting to point out process, the most recent method being so-called several distinctive features. mash-ups, which involves the morphing of dispa- rate genres and performances in a process remi- The e-commerce potential of the website has been niscent of Zappa’s xenochronic experimentation. used not only to sell existing CDs, but also to raise Because permissions from several copyright own- finance to advance the production of future work ers are difficult to coordinate, most mash-ups are to generate and advance. Marillion have pioneered never legally published.64 Established artists seem pre-ordering of scheduled CDs using bonus mate- to have caught on to the marketing and discovery rial as premium for fans willing to part with their power of mash-ups, in particular as it may rekin- money in advance. Finance is obtained on the base dle interest in their less recent catalogue of work. of an artistic track record and the interest is paid Similar to the case of the Marillion remix project, in music. David Bowie is offering the opportunity to fans to remix his work. Bowie has posted 31 high- Marillion make extensive use of e-mail to com- quality 30–40 second sound samples from various municate with their audience. Audiences in dis- compositions on his website and has asked fans covery mode are offered a free Marillion Crash Course CD if they send an e-mail containing to derive new songs by recombining bits and their name, postal address and date of birth, plus pieces of existing ones. Prizes are offered and the 65 the name of the website, magazine, newspaper or most successful mixes will be posted as well. other medium where they first heard of the offer. The current controversy over mash-ups was The CD is permanently updated to keep abreast sparked by the non-commercial release of the col- of the group’s musical direction. The feedback lection of mash-ups called the “Grey Album”. provides basic demographic information, includ- The recordings feature vocal tracks from Jay-Z's ing data about geographical distribution – a use- “The Black Album” laid atop music from the ful tool in planning performances and tours. An Beatles’ “White Album”.66 EMI, the copyright e-mail vehicle, the Marillion eWeb, is used to owners, have threatened legal action.

E-COMMERCE AND DEVELOPMENT REPORT 2004 84 CHAPTER 3: THE CREATIVE INDUSTRY AND DIGITAL AND INTERNET TECHNOLOGIES: THE CASE OF MUSIC

Creative licence 8. Online intermediaries and services

Completely different in nature and intent, the During the last 10 years a number of portals have website of Neil Young (www.neilyoung.com) is emerged whose sole purpose is to promote undis- designed to support the artistic vision of his latest covered or unsigned musical talent or to interme- work and provides little e-commerce functional- diate and bring existing talent to the Internet. A ity. It does provide, however, extensive commen- number of these will be briefly described here. tary on the content, lyrics as well as full-length They may serve as examples for setting up local streams of all the songs, and video footage of per- and regional portals in developing countries in formances. Closer to main street, the portal of order to promote local talent and culture. It is folk musician Kate Rusby (www.katerusby.com) interesting to see where the portal owners are is a well-executed and particularly navigable and domiciled and to realize that the Internet and its discoverable structure. An independent artist, domains are not reserved for anyone in particular, Rusby has managed to sell more than 60,000 CDs not the least for developing country artists or and establish an attentive audience. businesses. For example, a query on “Jamaica music portal” will return a top hit on Reggae- Jololi, the label of the established Senegalese artist Train.com, a portal with a domain owned by a US Youssou N’Dour, was founded in 1996. The entity that forwards its e-commerce to Ama- recording studio Xippi was already in place, and zon.com. Given the accessibility and the price of there was clearly a great deal of interest in new technology, there is nothing stopping established Senegalese talent from overseas after the success of artists or music industries from developing coun- Youssou N'Dour's album “Wommat”. The Jololi tries promoting their culture and products online. website (www.jololi.com) is well designed and provides a high level of discovery and good navi- gability. Artist overviews, biographies and discog- One of the first portals was the Internet Under- raphies are provided with some audio clips as well. ground Music Archive (IUMA). IUMA pioneered There is a definite African flavour in the design the delivery of music on the Internet in 1993 and and there has been no rush to eye-catching or gim- has hosted over 25,000 artists and 100,000 songs. It micky presentation. Jololi has started to make provides artists with promotional and community inroads into the international market and has tools such as an individual and customized web entered into licensing arrangements with various page for posting information and files for stream- distributors throughout Europe, including Real ing or download, sells CDs, creates message boards World, World Circuit, DeLabel and Virgin. and fan lists, manages fan e-mail, and finally show- cases artists’ music to IUMA industry partners. The well-known Caribbean musician Eddy Grant has developed an extensive website in support of his Another original online portal, GarageBand.com, label Ice Records, which he founded to carry the was founded in October 1999 to create a merit- release in 1977 of his first solo album, “Message based system for evaluating the artistry of emer- Man”. The website (www.icerecords.com) and label ging musicians. In 2001, it attempted to establish are much more than storefronts. They provide an itself as a new record label but failing to secure interesting glimpse into the musical traditions of the broad distribution and promotion, it was forced to region and the efforts to maintain the musical her- shut down its website in February 2002. Fortu- itage with new productions but also by acquiring nately, already in May 2002 the site was re-opened and reissuing historical recordings of artists such as and Evolution Artists Inc acquired Garage- Lord Kitchener or Roaring Lion. The website offers Band.com’s assets. GarageBand.com offers a range one-minute quality audio previews of almost 100 of free and paid services to musicians, including songs in the Ice Records catalogue. Grant’s discus- concert promotion and consultancy. Content eval- sions about music in general and in the Caribbean, uation is done using Internet-based peer reviews as well as his takes on global issues, give an interest- and aims to provide a well-organized ranking of ing insight into the man and the artist, uncommon the best new independent music. The process starts in the mainstream industry that often “produces” when a song is received. But to submit a song, an and public image for the artist to “match” the music artist needs to have rated at least 30 compositions and its target audience. The website gives details on by other artists. Listeners are randomly assigned to the artists it produces and has e-commerce capacities review new songs, and rankings are produced on enabling the purchase of CDs. the basis of their ratings. While major labels and

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 3: THE CREATIVE INDUSTRY AND DIGITAL AND INTERNET TECHNOLOGIES: THE CASE OF MUSIC 85 publishers have signed many of GarageBand.com’s consign copies of their inventory to the Ama- top-ranking artists, it is the opportunity to earn zon.com warehouse. Amazon manages any orders unbiased feedback and recognition that provides and shipping, and monitors inventories. immediate value for musicians. Other portals worth inspecting for best practice On Demand Distribution (OD2) is a European are Peoplesound.com, Mudhut.co.uk, Get- distributor of online music. However, it does not signed.com, Artistdirect.com and CDBaby.com. run its own music portal but provides Internet- Each is differently balanced in that one will cater based technologies and music content to websites to audiences seeking free downloads and a discov- such as Virgin Downloads, FNAC and Media ery experience, another will push for-pay services Markt, thus squarely placing it in the B2B cate- for aspiring artists while yet another will try to gory. OD2 provides a complete end-to-end solu- establish credibility as an insider regarding future tion, including encoding of source material, pre- talent and trends. In most cases, musicians can and post- release promotion, distribution, and manage better contractual terms and conditions revenue, licence and royalty management. Its than by signing with the majors or any of their objective is to sell and promote its music portfolio subsidiaries. The trade-off for achieving a higher through online retailers while ensuring that royalty percentage is that online promoters may record labels and artists receive compensation. Its not have the marketing and promotional infra- services and technologies support a variety of for- structure to match the talent. Thus, truly excellent mats, including mp3, WMA and ring tones, per- songwriters and performers may not maximize form encryption for secure distribution, and pro- their commercial or celebrity potential. However, vide hosting and turnkey e-commerce site they would necessarily remain in charge of their development. OD2 sold one million downloads artistic development. through its European retail partners during the first three months of 2004, in what is a tenfold increase on the same period last year and a 100 per G. Music copyrights, piracy cent increase over the last quarter of 2003.67 and derivations

Founded in April 1999, Vitaminic is a European International copyright law is governed by the portal for the promotion and distribution of Berne Convention for the Protection of Literary music over the Internet. It combines content from and Artistic Works,69 the UNESCO Universal major record companies, independent labels and Copyright Convention,70 the Geneva Convention unsigned artists, offering them the opportunity to for the Protection of Producers of Phonograms,71 promote and sell their music. It currently has 10 the World Intellectual Property Organization local websites, of which nine are in Europe (Italy, (WIPO) Copyright Treaty72 and the WIPO Phon- United Kingdom, Germany, France, Spain, Neth- ograms and Performances Treaty.73 Other legisla- erlands, Sweden, Denmark and Ireland) and one is tion and treaties of importance are the European in the United States. All the local sites reflect the Union Copyright Directive,74 and the European individual markets in which they operate. Unusu- Union Information Society Directive,75 and the ally for such a business, Vitaminic was listed at Digital Millennium Copyright Act76, the Audio Nuovo Mercato of the Italian Stock Exchange in Home Recording Act77 and the No Electronic Milan in October 2000, shortly after receiving $20 Theft Act of the United States. million of venture capital funding from four international investors.68 1. Copyrights The opportunity to intermediate independent artists by using technology has been an obvious pros- A general discussion on the role of copyrights in pect for Amazon.com. As early as 1995, it set up music and creative activities can be found in many the Advantage Program, a portal for artists and places (Lessig, 2004; Vaidhyanathan, 2003), includ- publishers to promote and sell their titles through ing UNCTAD’s own analysis of this issue Amazon.com. The Advantage Program recently (UNCTAD, 2000). While nobody can deny copy- hit the headlines when the rock band Pearl Jam right protection a role in creative and cultural decided to join. Before signing up new artists, it is industries, it is necessary to approach this issue in a important to establish that they own the rights to balanced way analysing the function of property in their work. Once this has been ascertained, they an environment where the commons, or public

E-COMMERCE AND DEVELOPMENT REPORT 2004 86 CHAPTER 3: THE CREATIVE INDUSTRY AND DIGITAL AND INTERNET TECHNOLOGIES: THE CASE OF MUSIC domain, is an equally indispensable input into cre- cally for Internet activities and more generally for ative processes and production. Intellectual prop- the future information society. erty is not an absolute, and to appropriate all content to a rent-seeking entity is a misguided There is certainly no lack of controversy about ambition. “Just because some regulation is good, it recent developments in copyright laws and doesn’t follow that more regulation is better.”78 regimes, the effects of which have been to increase the power of rights owners and decrease the Since copyright is often discussed from a legal and growth of the public domain. Depending on ethi- technical perspective, it may be useful to revisit its cal, political or economic perspectives, this can be seen as a positive or a negative process. From a economic role and purpose. Human thought and developing country’s economic perspective, the creativity are abundant. As resources they are short-term outcome is a net increased cost of peculiar in that they grow with use. The Internet access, with a consequential possible decrease in and ICT take this notion to its extreme. Copy- access to copyrighted materials, precisely because right takes a free expression of the human mind the majority of rights holders are from the devel- and restricts its use, thereby producing scarcity. oped world. The medium-term perspective is one Thus it aligns two diverging historical develop- of alleged opportunity and will depend on devel- ments. The first is the constant improvement in oping countries’ managing to develop and hold on communication, which generates an exponential to copyrightable content, as well as developing increase in the volumes of “content”. The second professional and legal capacities to collect royalty is the need for scarcity, which will prompt eco- payments, enforce rights and remedy infringe- nomic agents to develop and trade “content” in ment. markets. Music under copyright is (more) scarce and therefore can have market value. Investment Having copyright law in place may be necessary in its commercialization and promotion may then but is insufficient. Without a legal system that is be forthcoming, and it could become a traded cost-efficient and willing to provide and enforce product, available to the multitude through the legal remedy, compensating those whose rights mechanism of the market. The Internet decreases have been infringed, copyright law is a paper tiger. content scarcity, while societies fearing change Without publishers and collecting societies to strengthen copyrights and develop technologies, license works, monitor use and collect and redis- such as DRM, to increase scarcity and counteract tribute royalties, copyright rents cannot be this trend. If the capacity to restrict and control secured. An often-cited example is that of Jamaica. content is finite, while content growth may be Its artists represent a 3.5 per cent share of the glo- infinite, the endgame seems futile. bal music market and generate about $385 million of the royalties received by collecting societies in To complicate matters further, digital and Internet developed countries. Jamaica's own collecting technologies have increased the scope of “copy- societies lack the capacity to manage this income. ing” and clouded our notions about what it is There are estimates that, with enhanced collection exactly. The potential for confusion becomes capacity, Jamaican artists would significantly clearer when we consider two more conflicting increase their copyright revenues and generate at issues. The first is that modern law assigns, by least a 3 per cent increase in gross domestic default, a restrictive copyright to all published product.79 content, including everything uploaded to the Internet. Content does not need to be registered, But not all developing countries have significant although it may be advantageous to do so, and no music exports. Thus, the practical feasibility of col- obvious copyright statements need to be included. lecting societies acting on behalf of artists from The second issue is that computers access Internet developing countries exporting small volumes of content by requesting a copy of the files contained copyrighted material is not a foregone conclusion. on a web server, loading the copy into memory or While modern copyright regulation needs to be in on the hard disk drive and then presenting these place to provide economic compatibility in our files in a browser, thus technically breaking the increasingly globalized world, it does not need to implied copyright. While trivial in 99 per cent of be used always, by everyone and at any price. And cases, this incompatibility serves to illustrate the perhaps the modern music industry of the devel- inappropriateness of traditional copyright specifi- oped world, with its dependence on copyright

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 3: THE CREATIVE INDUSTRY AND DIGITAL AND INTERNET TECHNOLOGIES: THE CASE OF MUSIC 87 rents and concentrated markets, does not have to be from music file sharing on p2p networks on CD the unique model for every artist or cultural milieu, sales and will have no impact on the supply of particularly in places where collective experience music. Other studies (Liebowitz, 2003) have and ownership and use of the commons have strong expressed different views but question the ultimate roots and tradition in music and the arts. severity of the p2p effect on the recording industry. Finally, improved discovery using p2p networks 2. Piracy may have prevented what would otherwise have been unwanted or disappointing purchases.

Until recently, music piracy could be generally The first casualty of strengthened enforcement and defined as the violation of copyrights by making litigation is the notion that copyright is needed to unlicensed physical copies of released music – on provide incentives and motivate creativity and CDs, music cassettes or vinyl records. Indeed, the innovation in music. If we consider the imbalance IFPI Commercial Piracy Report 2003 analyses spe- in contract the majority of recording artists cifically physical piracy. It reports that worldwide endure, described in part C, such incentives have one in three CDs is pirated. The total value of sales probably been realized only to a very limited of pirated media was $4.6 billion. Several of the extent. Thus, the purpose of copyright in stimulat- largest developing country music markets, such as ing the “innovation and creativity” of artists is Brazil, China and Mexico, were evaluated as hav- downgraded to protecting the “investments” of ing physical media piracy levels of over 50 per cent. corporations. Given that investments are made, and the corresponding financial risks incurred, by Moving to the Internet, there is little dilemma giving advances to artists recoverable from sales, about the illegality of sharing music under copy- the business model can easily degenerate into man- right through p2p networks and the activities of aging a poorly performing advance portfolio, per- ripping for redistribution, uploading and down- haps partly because of the moral hazard presented loading music without permission. On the other in the security of earnings acquired through copy- hand, most of the technologies that enable users to right monopolies in a concentrated industry. engage in illegitimate activity are legal because they Restructuring and changing business models can be have thoroughly legitimate uses: ripping, sharing a slow and risky process and big companies may and burning music and other content under fair choose to let more “expendable” entities spearhead use provisions, from media that is owned by the change and conduct experiments. What is success- user or comes from the public domain. Thus Inter- ful can be eventually brought in line with what is net file sharing has led the mainstream music indus- “acceptable” through litigation or buyouts, but try to cry foul and use its political and financial usually both. influence to assert its interests. The second casualty is the public domain. Strength- Legislation and litigation aimed at curbing Internet ened legislation has only extended the scope and piracy of music seek validity in legal logic and duration of rights held and bars content from enter- theory. However, many – including the recording ing the public domain. A secondary problem is that, industry – see this as an important but insufficient given these extensions, seeking permissions argument. The power of conviction lies with prov- becomes a critical legal activity that requires ing that there is quantifiable and important eco- resources beyond the reach of many artists. Finally, nomic damage done by piracy. However, calculat- keeping content out of the public domain and under ing lost sales from the number of illegitimate files copyright is pointless if the content has no commer- in circulation in global p2p networks requires many cial potential. Thus music that is “out of print” may assumptions. Equally difficult is establishing a remain trapped and eventually forgotten: a disserv- causal relationship between file-sharing activity and ice to audiences and artists alike. CD sales. There are too many factors that can explain away the global drop in sales. The end of the The third casualty is the scope of fair use. DRM less- vinyl replacement market, greater time and money ens the need for copyright law as it overrides restric- spent on DVDs, computer games and the Internet, tions imposed by a copyright contract and reintro- or the general post-Internet bubble economic duces them through technological locks and keys. downturns are commonly cited reasons. One recent Under copyright, users rights had some flexibility study (Oberholzer and Strumpf, 2004) has con- and fair use could be subject to debate and litigation. cluded that there is no statistically significant effect Replacing copyrights with DRM technology

E-COMMERCE AND DEVELOPMENT REPORT 2004 88 CHAPTER 3: THE CREATIVE INDUSTRY AND DIGITAL AND INTERNET TECHNOLOGIES: THE CASE OF MUSIC removes the partial but useful flexibility of a contract The basic premise for the CC project is that too between people. But DRM technology is not often the debate over creative control tends to unbreakable and thus national legislation and inter- the extremes. At one end is a vision of total control national treatise have been introduced and anno- — a world in which every possible use of a work is tated to criminalize the breaking of DRM locks and regulated and in which "all rights reserved" (and the related exchange of information and tools. This then some) is the norm. At the other end is a vision can result in an unnecessary criminalization of legit- of anarchy — a world in which creators enjoy a wide imate and fair use with devices, such as computers or range of freedom but are left vulnerable to exploi- DVD and CD players, that run on free and open- tation. Balance, compromise and moderation have source software.80 become endangered species. To provide a remedy and an alternative, CC uses copyrights to create public goods: creative works that are set free for cer- 81 3. Open solutions tain uses. Through a variety of its carefully worded licences, it offers artists ways to protect their works What starts out as a binary issue – restrictive copy- while encouraging specified freedoms of use by 83 right or public domain – may eventually resolve declaring “some (but not all) rights reserved”. itself through a balanced and nuanced approach, in particular with the assistance of Internet and digital In December 2002, CC released a set of copyright technologies. The quest for alternatives started licences that are free for public use and that draw with the FOSS movement, which sought to give inspiration in part from the Free Software Founda- programmers and users freedoms of use by using tion’s GNU General Public License (GNU GPL). copyright to restrict appropriation. Its counter- CC has developed a Web application that helps parts in the creative industries are the Creative people dedicate their creative works to the public Commons (CC) project and open-source record domain, or retain their copyright while licensing labels, and are in part a reaction against what some them as free for certain uses, on certain conditions. musicians see as excessive control of music through CC licences are specifically designed for creative works and activities, such as websites, scholarship, overly restrictive copyrights that hamper deriva- music, film, photography, literature, courseware, tive works. As derivation is at the heart of the cre- and so forth. ative musical processes, musicians need to reappro- priate and reinterpret music and sounds to enable The objective is not only to increase online content, them to create truly innovative music. Music is, in but also to make access to that content cheaper and essence, an art of derivation that is inspired by and, easier. To that end, CC has developed metadata that often unashamedly copies, existing compositions can be used to associate creative works with their or performances. Digital technologies have not public domain or licence status in a computer- or changed this; they have just made it easier. Direct machine-readable way. This will enable people to quotations in popular music are not uncommon – develop and use online search applications to find, an obvious example from the pre-Internet era is for example, songs that are free to use provided that Madonna’s derivation of “Like a virgin” from the the original composer and/or performer is credited, Four Tops’ tune “I can’t help myself”, or the The or songs that may be copied, distributed or sampled Jam’s derivation of their song “Start” from the with no restrictions, or with clearly defined limits. Beatles’ classic “Taxman”. Jazz music is extremely Eliminating the need for legal intermediation, the derivative, while many traditional genres such as CC project aims to contribute to reducing barriers Raï or Blues have little or no sense of ownership to creativity. and are based on commons. While derivation using musical ideas in abstraction can be positively Loca Records is an independent British record argued for, the use of excerpts or samples of a cop- label that releases music under Copyleft licences yrighted composition or recording is subject to that allow freedoms similar to those of the GNU seeking and acquiring permissions. If this is not GPL, including copying, re-release, modification done, the deriving artist may be asked in court to and sampling, with the requirement that the new prove the insignificance of the material used in work uses the same licence. Loca's first two relation to the new composition, in terms of both releases – in 1999 – were under the GNU GPL. quality and quantity. In this sense, the notions of Subsequent releases have been on the EFF Open the acceptability of using, say, up to eight musical Audio License.84 Loca is now releasing all work bars or 10 seconds are misguided.82 under the Creative Commons licence known as

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 3: THE CREATIVE INDUSTRY AND DIGITAL AND INTERNET TECHNOLOGIES: THE CASE OF MUSIC 89

Attribution-ShareAlike. One notable difference may not experience unmanageable levels of anxiety between the Creative Commons licence and free or from the threat of technological change. open-source licences such as the GNU GPL is that it does not require that the unmixed source tracks Music markets in developed countries are in their be made available. Loca is planning a proper free/ mature phase and future growth will depend on open-source release that will contain a selection of convincing audiences to part with leisure time ded- samples that were used to produce the composi- icated to other activities: a difficult proposition at tions, together with the final music. best. Large music markets in developing countries Magnatune is a small record label from California have growth potential and will continue to attract that produces music under a variety of licences, the interest of the majors, provided that they can including the Attribution-NonCommercial-Share- establish workable copyright environments. The Alike licence from the Creative Commons. It cur- international industry will continue to lobby for rently sells music for download through its website. the elimination of any perceived trade restrictions John Buckman, CEO of the e-mail software com- on the import of cultural goods and services. At the pany Lyris, founded Magnatune in spring 2003. same time developing nations need to re-examine Magnatune makes non-exclusive agreements with GATS support for “mode four” delivery of services artists, and gives them 50 per cent of any proceeds through the movement of natural persons in order from online sales or licensing. Users can stream and to improve conditions for their artists’ work and download music in mp3 format, without being travel when pursuing performance income. charged, before making a buying decision. Even though using liberal licensing is not a new idea in Developing countries with large national and itself, Magnatune is one of the first and most visible diaspora markets, such as Brazil, India and China, companies to try to build a business in music around will improve their grasp of technology and will this idea. undoubtedly succeed in increasing international sales of CDs, as well as venture into online for-pay Opsound is a portal that provides links to music downloading. The artistic and cultural communi- released under open source or copyleft licences. The ties need to fully appreciate the commercial website tries to facilitate open content music by mechanics of the industry at an international level indexing songs and aiding a community. Opsound in order to assess what mix of activities and corre- has no facilities for money transfers. Most new songs sponding revenues (recording, composing and per- are licensed under the Creative Commons Attribu- forming), and technologies, will maximise their tion-ShareAlike 1.0 licence. Popularity charts were earnings and provide for the greatest continuity, added towards the end of 2003 and the beginning of stability and success in their artistic careers. 2004. Many compositions are available labelled as “remix ready” whereby the artist indicates the willingness to provide the unmixed source tracks on The main issue will be one of scaling costs to activ- request. ities and choosing the appropriate technologies. Ambitions need to be realistically dimensioned, it being understood that the majority of major releases H. Conclusions do not achieve profitability. Given the general improbability of major earnings from recording, The international music industry has entered a tur- artists may be motivated to develop online activities bulent period. No stranger to technology, it more fully, assisting audience discovery and thus should have no problem in extrapolating past generating improved revenues in concert perform- trends into future developments. The nature of its ance or will compose for other musicians. Because reaction is, however, a different matter. While for- both traditional copyrights and liberal open-source pay download sites such as Apple’s iTunes have licences’ require legislation and protection, devel- been doing well, true success will come when p2p oping countries need to have in place a legal envi- networks and file sharing become fully legitimized ronment and collecting agencies. Artists should not through subscriptions or indirect earnings such as shy away from exploring open licensing under the advertising. Unfortunately, the majors are unlikely impression that it means giving away work and to lead the charge, particularly since they are still music for free. The spectrum of choice is large, while recovering from the Internet bubble. This leaves the type of contracts offered by the majors to the the field wide open for technology companies that selected few are but one variant.

E-COMMERCE AND DEVELOPMENT REPORT 2004 90 CHAPTER 3: THE CREATIVE INDUSTRY AND DIGITAL AND INTERNET TECHNOLOGIES: THE CASE OF MUSIC

References

Bakker G (2003). The making of a music multinational: The international strategy of Polygram 1945–1998, AFM Working Paper No. 12; accessed on 14 June 2004 at http://www.essex.ac.uk/AFM/research/working_papers/ WP03-12.pdf .

Benkler Y (2000). From consumers to users: Shifting the deeper structures of regulation toward sustainable common and user access, Federal Communications Law Journal, 52.

Caves R (2000). Creative Industries: Contracts between Art and Commerce, Harvard University Press, Cambridge, MA.

Gronow P and Saunio I (1998). An international history of the recording industry, Cassell, London and New York.

Hesmondhalg D (2003). The Cultural Industries, SAGE Publications, London.

Krasilovsky MW, Shemel S and Gross J (2003). This Business of Music, Watson-Guptill Publications.

Lessig L (2001). The Future of Ideas: The Fate of the Commons in a Connected World, Vintage Books,

Lessig L (2004). Free Culture, Penguin Press, Harmondsworth, UK.

Letts R and Ingles E (2003). The effects of globalisation on music, International Music Council, http:// www.unesco.org/imc/mmap/pdf/int-dl-finrep-brief-e.pdf.

Letts R and Nzewi O (2003). The effects of globalisation on music, International Music Council, http:// www.unesco.org/imc/mmap/pdf/int-dl-finrep-brief-e.pdf.

Liebowitz S (2003). Will mp3 downloads annihilate the record industry?, School of Management, University of Texas at Dallas.

Mayer M (2004). How little is too little? New ruling provides guidance on when digital music sampling constitutes musical infringement, Intellectual Property and Technology Newsletter, Mitchell Silberberg and Knupp.

Mewton C (2001). All you need to know about music and the Internet, Sanctuary Publishing Limited.

Oberholzer F and Strumpf K (2004). The effect of file sharing on record sales: An empirical analysis, http:// www.unc.edu/~cigar/papers/FileSharing_March2004.pdf.

Rapaport D (2003). A Music Business Primer, Prentice Hall.

Schultz J (2003). File sharing must be made legal: Suing 12-year-olds and grandmothers isn't the answer. There's got to be a better way, http://www.eff.org/share/20030912_jason_salon.php.

Shell GR (2003). Suing your customers: A winning business strategy?, in Knowledge@Wharton, http://knowledge.wharton.upenn.edu/articles.cfm?catid=7&articleid=863.

Solum B and Chung M (2003). The layers principle: Internet architecture and the Law Public Law and Legal Theory Research Paper 55, University of San Diego School of Law, California.

Théberge P (1989). The “Sound” of music: Technological rationalization and the production of popular music, New Formations, 8.

UNCTAD (2000). Copyrights, competition and development: The case of the music industry, UNCTAD Discus- sion Paper No. 145, UNCTAD/OSG/DP/145.

UNCTAD (2003a). E-Commerce and Development Report 2003, UNCTAD/SDTE/ECB/2003/1.

UNCTAD (2003b). Music Industry Workshop, Proceedings of the Youth Forum, UNCTAD/LDC/MISC.82.

Vaidhyanathan S (2001). Copyrights and Copywrongs: The Rise of Intellectual property and How it Threatens Creativity, New York University Press, New York.

Vernon P (1997). Odeon records: Their ‘ethnic’ output, http://www.mustrad.org.uk/articles/odeon.htm.

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 3: THE CREATIVE INDUSTRY AND DIGITAL AND INTERNET TECHNOLOGIES: THE CASE OF MUSIC 91

Notes

11. Public goods are those that simultaneously satisfy the criteria of non-rivalry and non-excludability. The consumption of a non-rival good by one consumer does not decrease its utility for another consumer. Non-excludability implies that it is difficult, if not impossible, to charge people money for the use of the good. Examples of non- excludability are breathing air and walking through a public park.

12. See http://www.pwcglobal.com/e&m/outlook/Outlook2002_ExecSummary_Final.pdf.

13. At the time of writing, Bertelsmann and Sony have finalized the merger of their recorded music divisions, which is likely to attract some regulatory attention on both sides of the Atlantic. Time-Warner’s plans to leave the music industry may lead to some form of merger of its music divisions with EMI, or a sale of those divisions to a consortium led by Edgar Bronfman.

14. Estimate for BMG sales based on http://www.bertelsmann.com/documents/en/Unternehmen- spraesentation_weiss_e_300104.pdf.

15. Victor was a result of the merger between Emile Berliner's Berliner Gramophone Company, which produced flat disc phonograms, and the Consolidated Talking Machine Company, which manufactured players for records.

16. See: http://www.mustrad.org.uk/articles/gauhar.htm and http://www.tribuneindia.com/2002/20020526/ spectrum/main7.htm.

17. Forbes, 17 July 1995 (check original source).

18. For a detailed description of the development and business economics of Polygram, see Bakker H (2003).

19. See http://www.abpd.org.br/dados/decada90.htm.

10 See http://www.ifpi.org/site-content/press/20030710.html.

11. Figures as reported at the annual RISA meeting by by Russell Crawford, Chairman of the Anti-Piracy Sub-Com- mittee.

12. See Letts and Ingles (2003).

13. See Letts and Nzewi (2003).

14. See The Economist, Rumba in the jungle, 18 December 2003. http://www.economist.com/printedition/display- Story.cfm?Story_ID=2281725.

15. IFPI, The Recording Industry: World Sales 2003, 2004.

16. UNESCO Global Alliance for Cultural Diversity, see: http://portal.unesco.org/culture/en/ev.php- URL_ID=17176&URL_DO=DO_TOPIC&URL_SECTION=201.html.

17. Typically, a number of recordings are contracted for delivery over a specified period of time. If contractually agreed, the copyrights and the physical master recordings may revert back to the artist after a certain period. This is, however, more an exception than a rule. The master recording is the unique final product from which all copies are made. The master was usually produced on high-speed stereo magnetic tape, whereas today a number of analogue and digital formats are used. A mechanical right is the right to reproduce copyrighted material in a fixed medium, such as CDs or music cassettes. Royalties are also paid in exchange for the rights for music publishing and performance. However, the chapter will not go into this issue as it may dilute the discussion because it requires a discussion of broadcast, which cannot be done justice within the scope of this chapter. See Krasilovsky, Shemel and Gross (2003) for a comprehensive discussion of music recording, publishing and performance contracts and rights.

18. The discussion here owes much to the excellent analysis by Krasilovsky, Shemel and Gross (2003). For a more colourful description of the mechanics of the music business see Steve Albini’s The problem with music, in T Frank and M Weiland, 1997; (eds.) Commodify Your Dissent: Salvos from the Baffler, New York, W.W. Norton and Co.; and Courtney Love’s “Courtney Love does the math” at http://dir.salon.com/tech/feature/2000/06/ 14/love/index.html.

E-COMMERCE AND DEVELOPMENT REPORT 2004 92 CHAPTER 3: THE CREATIVE INDUSTRY AND DIGITAL AND INTERNET TECHNOLOGIES: THE CASE OF MUSIC

19. It may be necessary to note that there is an established musical convention for songwriting, whereby the artist does not, in principle, produce recordings for public commercial distribution under a contract with a record company. Songwriters write songs and music for sale, using the intermediation of a publishing company. The rights they sell depend on the ultimate use: mechanical rights to a record company, performance rights to a radio station, synchronization rights to a film studio, and so forth.

20. See Krasilovsky, Shemel and Gross (2003), chapter 40, "Work permits for foreign artists" 21. See http://www.wto.org/english/docs_e/legal_e/26-gats_01_e.htm.

22. An excellent example of this position preoccupied with opening markets rather than creating opportunities for artists from developing countries is the IFPI Response to the EC Consultation Document on the GATS 2000/ WTO Negotiations concerning Audiovisual Services (Music and Recreational Software) and Cultural Services, which opens with the statement that "The European music industry urges the Commission and Member States to pursue a proactive agenda during the GATS discussions that will help to eradicate trade barriers and open up difficult markets". The difficult markets listed in the text represent 4.3 per cent of global CD sales. See http:// www.ifpi.org/site-content/library/gats-questionaire.pdf.

23. Technology and music have a deep-rooted relationship that goes back to before modern digital technologies. A casual visit to any museum with a collection of musical instruments will reveal the complexity and extent of the efforts of instrument craftsmen, the seminal music technologists, to improve existing design and test innovations. 24. Some may debate this and go further back in time. Undoubtedly, the pace of past improvements and innovations will seem rather slow by today’s standards. For example, the invention of the piano forte by Cristofori in 1698 and its development by Silbermann in the 1730s and 1740s (Bach had apparently provided critique, although the scope of his involvement and acceptance of the instrument is controversial) led to a modern form of the concert piano that was only finalized in the mid-nineteenth century, with major improvements such as an iron frame and double action. The saxophone, a widely popular but non-classical instrument, was invented in 1846 by Sax and was consigned to use in military marching bands before jazz styles eventually increased its use and exposure, but only 70 years later. Both instruments provided greater sound volume and stability than their predecessors, to the benefit of musicians and audiences. The same developments led to music inspired by and highlighting these new capacities. For more details see http://www.baroquemusic.org/silblegacy.html and http://www.jackgib- bons.com/composers/bach.htm, and the online discussion at http://www.bach-cantatas.com/NonVocal/Var- Italian-DVD.htm. 25. See http://www.asia.apple.com/hardware/ads/ripmixburn-long.html and http://www.macworld.com/2001/ 10/macbeat/rip/.

26. See http://www.illegal-art.org/audio/grey.html, http://www.rollingstone.com/news/newsarticle.asp? nid=19292 and http://www.nytimes.com/2004/02/25/arts/music/25REMI.html?ex=1083297600&en d12f9e50d04773c2&ei=5070.

27. See http://mixonline.com/ar/audio_mothers_sound/. 28. Originally, their purpose was experimental and their use was mainly in academic study. The slow replacement of the vacuum tube with transistor technology led to reduced size and greater reliability and operational stability and increased consideration of them in mainstream use. Robert Moog created the first playable and configurable music synthesizer in 1964.

29. The speed of this process is critical for the quality of real-time music recording and reproduction. The speed, or “sampling rate”, indicates how many times per second a sound will be measured or, going the other way, how many data measurements will be read and assembled to reproduce one second of sound. The bit depth of each reading indicates the size of information acquired in one read. The standard for music CDs is 44,100 samples per second, each sample being assigned one of 65,535 discreet values, i.e. “16 bits” in technical language.

30. Ripping is the process of extracting one or several songs from a music CD and copying them to a computer hard disk. This entails translating the CD format, also known as the Red Book audio CD standard (or IEC 908), into a computer file format, such as .wav, .mp3, .ogg or .wma. 31. Quoted from Sound on Sound (2004) Wyclef Jean, Producer, July issue.

32. See UNCTAD (2003a), in particular chapter 4, and the Free Software Foundation at www.gnu.org .

33. See: http://www.freedb.org/freedb_stats.php.

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 3: THE CREATIVE INDUSTRY AND DIGITAL AND INTERNET TECHNOLOGIES: THE CASE OF MUSIC 93

34. To see the source code of a website in Internet Explorer click View > Source on the menu; in the Mozilla web browser click View > Page Source; this “bare all” nature of web pages enabled the fast adoption and broadest use of the World Wide Web and html standard as the main Internet platform. Amateurs and experts alike could learn from each other and share clever or effective solutions.

35 . See UNCTAD (2003a), in particular chapter 4, and the Free Software Foundation at www.gnu.org.

36. The full text of the ruling is available at: http://www.grokster.com/files/030425_order_on_motions.pdf .

37. See Schultz (2003).

38. For a more detailed discussion on why “suing your client” may not be a good busines, see practice Shell (2003).

39. For interesting descriptions of the dispute between the FM radio inventor Edwin Howard Armstrong and his one-time employer, RCA, which reportedly saw FM technology competing with its AM radio network, see http://www.webstationone.com/fecha/armstrong.htm, http://users.erols.com/oldradio/ehabio.htm, http:// world.std.com/~jlr/doom/armstrng.htm and Lessig (2004: 4-8).

40. See Lessig (2004: 76).

41. IFPI (2004) Online Music Report 2004, http://www.ifpi.org/site-content/library/online-music-report-2004.pdf.

42. An increasing number of for-pay music download portals are coming online, such as RealRhapsody WalMart Music Downloads. They are similar in nature and may provide a competitive environment to the benefit of consumers. However, they are not conceptually, commercially or technically distinctive and are therefore not reviewed.

43. For a detailed examination of the free and open source software phenomenon, see UNCTAD (2003a).

44. See UNCTAD (2003), chapter 4.

45. See http://www.lawguru.com/newsletters/2000/05/32016.html.

46. BBC reporting of Media Metrix figures, http://news.bbc.co.uk/2/hi/business/2234947.stm.

47. Following a ruling by the Central District Court of California on 23 April 2003 releasing the creators of the competing file-sharing programme Grokster from liability related to copyright infringement, a change of strategy was in order. See http://www.eff.org/IP/P2P/MGM_v_Grokster/030425_morpheus_win_pr.php and the actual text of the court decision at http://www.grokster.com/files/030425_order_on_motions.pdf . The decision has been appealed; details on the case can be seen at http://eff.org/IP/P2P/MGM_v_Grokster/.

48. The domain name was registered on 17 December 1997.

49. See http://www.lawguru.com/newsletters/2000/05/32016.html.

50. See http://www.theregister.co.uk/2003/11/15/hungover_cnet_wakes_up_next/.

51. See http://asia.cnet.com/newstech/industry/0,39001143,39158242,00.htm.

52. See GarageBand to Revive Old MP3.com Archive, The Wall Street Journal Online, 18 April, http://www.good- nightkiss.com/mp3restored.html.

53. Sceptics may point out that iTunes performance should be measured against global sales of 1 billion CDs or 10 billion songs. However, sceptics may also consider that many people do not listen to more than one or two songs from any CD anyway and that iTunes downloads are expressions of real moneyed demand and interest, while 80 per cent of CD content is a forced purchase imposed by the global production and distribution monopoly.

54. See http://www.apple.com/pr/library/2004/apr/28itunes.html.

55 “Standard” is taken to mean sound quality as provided by an Mp3 encoded 128 kilobit per second data stream. In comparison, uncompressed data from a standard compact disc streams at approximately 1,400 kilobits per second.

56. See http://www.theregister.co.uk/2004/06/23/apple_itunes_first_week/.

57. See Good-Bye, MP3; Hello, DRM! , PC Magazine, 458 The assertion of low overall profitability is an accepted industry figure; see http://www.riaa.com/news/marketingdata/cost.asp.

E-COMMERCE AND DEVELOPMENT REPORT 2004 94 CHAPTER 3: THE CREATIVE INDUSTRY AND DIGITAL AND INTERNET TECHNOLOGIES: THE CASE OF MUSIC

59. See: http://www.eff.org/share/.

60. See Maverick programmers prepare to unleash anarchy on the Web, The Wall Street Journal, 27 March.

61. For a detailed description of the proposed mechanism see A better way forward: Voluntary collective licensing of music file sharing, Electronic Frontiers Federation, http://www.eff.org/share/collective_lic_wp.php.

62. See http://www.soundonsound.com/sos/sep03/articles/marillion.htm.

63. See http://www.billboard.com/bb/daily/article_display.jsp?vnu_content_id=1000496380.

64. See http://www.salon.com/tech/feature/2002/08/01/bootlegs/print.html.

65. See http://www.acidplanet.com/contests/davidbowie/?ref=neverfollow.

66. See http://www.billboard.com/bb/daily/article_display.jsp?vnu_content_id=1000455930.

67. See http://www.ondemanddistribution.com/eng/press/pressdetails.asp?id=264.

68. See http://www.vcbuzz.com/new/vc.cgi?cobrand=icom&company=12561.

69. The full text can be found at: http://www.wipo.int/clea/docs/en/wo/wo001en.htm.

70. Most of the States parties to the Universal Copyright Convention (UCC) have become parties to the Berne Con- vention, rendering the UCC largely irrelevant today.

71. The full text can be found at http://www.wipo.int/clea/docs/en/wo/wo023en.htm .

72. The full text is available at http://www.wipo.int/documents/en/diplconf/distrib/94dc.htm.

73. The full text is available at http://www.wipo.int/clea/docs/en/wo/wo034en.htm.

74. The full text is available at http://europa.eu.int/eur-lex/pri/en/oj/dat/2001/l_167/l_16720010622- en00100019.pdf.

75. The full text is available at http://europa.eu.int/eur-lex/pri/en/oj/dat/2001/l_167/l_16720010622en- 00100019.pdf.

76 http://www.copyright.gov/legislation/dmca.pdf.

77 It is interesting to note that the Audio Home Recording Act did not foresee the use of computer hard drives as audio recording devices and is thus largely irrelevant to the current debate on p2p technologies and file sharing.

78. Lessig (2004), accessed on 6 May 2004, at http://www.jus.uio.no/sisu/freeculture.lawrence.lessig/doc.txt.

79. See http://www.iprcommission.org/graphic/Views_articles/Legal_Times.htm.

80. See http://www.gnu.org/philosophy/right-to-read.html.

81. See UNCTAD (2003).

82. See Mayer (2004).

83. See http://creativecommons.org/.

84. See http://www.eff.org/IP/Open_licenses/eff_oal.html.

85. See http://creativecommons.org/licenses/by-sa/1.0/.

E-COMMERCE AND DEVELOPMENT REPORT 2004 Chapter 4 ONLINE HIGHER EDUCATION: ISSUES FOR DEVELOPING COUNTRIES

A. Introduction within the context of any given economy and society. The purpose of this chapter is to inform the educational policy process by analysing how Education, given its important role in the eco- higher education services are provided and traded nomic, political and cultural development of any (either commercially or not) and outlining some State, is potentially one of the key sectors where of the trends resulting from the use of the Internet information and communication technologies in the provision of higher education. (ICTs) are applied. The opportunities presented by ICTs to change the content of and approach to learning as well as to extend the reach of educa- 1. Some definitions tional institutions could have a profound effect on development. The Internet has the potential to In order to clarify the variety of terms related to overcome geographical and time barriers, and to the subject, a number of definitions will be used in allow students to study in any place at any time. this chapter. The education sector includes basic Students in India are following a full technical education (the acquisition of literacy and numeri- degree online. Massachusetts Institute of Technol- cal skills), secondary education, higher education ogy (MIT) course content is available online to (also known as tertiary education) and, more spe- anyone interested. Finnish students can complete cialized professional training, as well as what is their degrees by attending several universities with- called “lifelong-learning” – the necessity to contin- out leaving home. Researchers, teachers and stu- ually update and learn new skills through either dents are communicating globally. corporate workplace learning or access to community education. In some countries, educational While there has been much debate about the poten- services, in addition to the above-mentioned tial advantages and disadvantages of online higher instructional activities, also include activities education from a pedagogical point of view, its designed to support educational processes (for study from an economic and policy perspective is example, educational testing services or student limited. Stakeholders in online higher education, exchange programme services). Arguably, educa- such as a small university seeking to expand and tion also extends into other kinds of cultural and improve what it offers, a ministry of education leisure activities – visiting a museum, watching a questioning how best to meet educational needs, an television documentary, going to the theatre or innovative entrepreneur or a student with limited reading a book. In all of these areas, ICTs – and in resources wishing to receive higher education, are particular the use of the Internet – are having an interested in finding out whether developing coun- impact on why and how people access learning tries can benefit from online education, whether it and what they use it for. can be developed locally and how much it costs. Stakeholders want to be reassured about the actual This chapter will be devoted to the higher educa- and potential value of online education, so as to tion sector defined as post-secondary education, assess whether it is worth the investment. Govern- including both “technical and vocational educa- ments and institutions, particularly those in devel- tion” (e.g. teacher training) and “education leading oping countries, want more information about to a university degree” (namely, graduate, post- online education, are concerned about what their graduate and doctoral studies).1 The reason for role would be, and ask for possible strategies to focusing on this sector is that international trade maximize the benefits of online higher education. in higher education is more relevant for national Governments. In 1999, OECD countries’ interna- The provision of education results from a combi- tional trade in higher educational services was esti- nation of policy action and market processes mated at $30 billion (Larsen et al., 2002).

95 96 CHAPTER 4: ONLINE HIGHER EDUCATION: ISSUES FOR DEVELOPING COUNTRIES

The potential uses of ICTs in education are vast: ing situation using some element of electronic or from radio and television programmes to the use digital resourcing (radio, audiocassettes, videocas- of CD-ROMs, e-mails and the World Wide Web. settes, TV, personal computers, e-mail, Web) and Our analysis will focus on one concrete applica- considers online education a subset of e-learning. tion: the Internet. The Internet has a number of uses within education: disseminating learning con- Another concept is blended learning. As the name tent, enabling communication between students suggests, blended learning is learning that com- and teachers, and engaging in and publishing bines different modes of student engagement. In research. The use of the Internet for education, practice, the use of blended learning has been lim- including the use of websites and e-mail, has come ited to the combination of online learning with to be known as online education. face-to-face instruction.

Online courses frequently use the Internet in com- Chart 4.1 provides an overview of these different bination with other delivery modes. For example, concepts and how they will be referred to in this they may require attendance at a two-day face-to- chapter. It also recognizes how ICTs have been face seminar or may provide some course materi- applied both to complement face-to-face course als by mail. In this chapter we therefore recognize delivery (e.g. by posting course information on that online education does not necessarily entail the Web) and to support distance-learning courses 100 per cent online provision, and will consider (e.g. by providing e-mail communications be- online courses to be those where most of the con- tween students and teachers). tent delivery and interaction is online.

E-learning is a broader notion than online learn- 2. The focus of this chapter ing and equally has no universally acknowledged or standard definition. In this chapter, we will This chapter provides an overall analysis of online use the most inclusive definition2 of e-learning, higher education and its implications for develop- which embraces every kind of teaching and learning countries. Beyond the scope of this chapter are

Chart 4.1 The e-learning continuum to online education

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 4: ONLINE HIGHER EDUCATION: ISSUES FOR DEVELOPING COUNTRIES 97 debates about the pedagogical effectiveness of capital has a stronger positive impact on growth in online education or about the relative cost-effi- the group of developing countries covered by the ciency of online education as opposed to tradi- study3 than in OECD countries. Increasing the tional education. availability of human capital depends critically on extending years of study and completion rates The chapter benefits from a background survey on beyond basic education. Access to and participation the economic costs and benefits of e-learning in in education are more limited in developing coun- institutions of higher education that was under- tries, particularly in secondary and tertiary educa- taken with a small sample of universities either cur- tion, where costs can be prohibitively high. rently engaged in, or planning to invest in, online education. The results of the survey (comple- Investment in education should be guided by how mented with parallel research) are summarized in it can help eliminate social disparities and promote annex I. On the basis of the survey results, five sustainable economic growth. Extending the bene- models of the provision of online education have fits of education means addressing constraints in emerged, as described later. Additional informa- terms of both public and private resources, as well tion in the chapter comes from existing published as institutional and individual resources. Public materials and interviews with e-learning practition- spending on education is an investment that bene- ers and educational managers. fits the poor (OECD–UNESCO, 2003). However, the extent of public funding is frequently contested The chapter is divided into four sections. Section A as soon as participation in education extends provides an introduction to what is understood by beyond basic primary education: in other words, the term “online higher education”. Section B dis- should secondary and tertiary education be subsi- cusses the importance of higher education for eco- dised by the State? Given these pressures, develop- nomic and social development and provides an ing countries have resorted more to private financ- overview of the higher education market. Section ing than developed ones (OECD–UNESCO, C explores the online higher education market. It 2003). Extending user fees as a means of cost recov- begins by explaining current drivers behind the ery can be seen as a tool both for and against development of online higher education and pro- equity. It can be argued that tuition fees in tertiary viding an overview of this market and the effects of education can be justified on the basis of the indi- the Internet on the internationalization of higher vidual return on investment from higher educa- education. After highlighting existing models of tion. However, the private costs of tertiary educa- online higher education, the section reviews the tion can be a barrier to the inclusion of qualified economic rationale of investing in online educa- students and is therefore an important policy con- tion. In addition, it reviews the current status of cern if the policy aim is to eliminate social and eco- the technology market and of the legal framework nomic disparities. in which online higher education operates, as well as the influence of these two factors on the dissem- The externality of higher education means that ination, and use of, and access to, higher education. when students invest in education they are not only The concluding section summarizes the impact of benefiting themselves but are also increasing the the Internet on higher education, and its implica- general knowledge available in society and there- tions, offering some recommendations for devel- fore contributing to economic and social develop- oping countries. It is hoped that the final conclu- ment. Higher education serves a number of impor- sions will help to stimulate rigorous discussions on tant functions that are central to the development the use of online higher education and its impact of nations – training teachers, lawyers, engineers, on developing countries. and so forth. It also has a social and cultural function both in providing social cohesion and in transmitting certain important social values. These func- B. The higher education market tions make education, to some degree, a public good. For this reason, even the most ardent liberal- 1. Education and economic growth izers acknowledge that there is some role for the State to play in regulating higher education. How- Education and human capital are recognized drivers ever, in almost all other areas of discussion about of economic growth and social progress. According higher education in general and its online provision to a joint OECD–UNESCO study (2003), human in particular, there is considerable debate.

E-COMMERCE AND DEVELOPMENT REPORT 2004 98 CHAPTER 4: ONLINE HIGHER EDUCATION: ISSUES FOR DEVELOPING COUNTRIES

Box 4.1 Educational priorities and contexts

Low-income countries Middle-income countries OECD countries

Basic education for all by 2015 Develop secondary and tertiary education Ensure quality of learning for all Address inequities, particularly female enrolment Competition with OECD educational Teacher shortages Training of teachers institutions Continuous learning Access to ICTs Develop access to ICTs Financing lifelong learning Wealth growth Education statistics Increasing diversity of students Quality and locally meaningful content and Demographic pressure Competitive educational services curriculum Bridging inequality Attract new students Affordable teaching materials and textbooks International recognition of accreditation Excellence Use of mother tongue Promotion of ICTs Community involvement

Source: OECD-UNESCO (2003); Johnston (2004); World Education Forum (2000).

As box 4.1 summarizes, educational objectives and students a year. The greatest increase has been in priorities frequently depend on the level of developing regions (see chart 4.2 and table 4.1). economic development of a country. This is by no means an exhaustive summary (countries within The different visions of the role of government in the same region, do have different needs) but it regulating and providing higher education have provides an overview of the different priorities resulted in a number of overlapping, competing countries have as regards higher education and the and complementary models of how and why different types of programmes they might higher education should be promoted and pro- concentrate on. vided. During the period 1980–2000, a market model of higher education was in the ascendant both in developed countries (English-speaking 2. The higher education market countries and parts of Western Europe) and developing countries. In developing countries educa- In 20 years, the number of higher education stu- tion in general has seen varying patterns of privati- dents has doubled, from 48 million to 102 millions zation. Whereas some developing countries have

Chart 4.2 World enrolments in higher education, 1980–2000 (number of students by region)

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 4: ONLINE HIGHER EDUCATION: ISSUES FOR DEVELOPING COUNTRIES 99

Table 4.1 World enrolments in higher education, 1980-2000 (number of students)

Region 2000 1990 1980 Growth 1990-2000 (%)

Africa 5 408 984 2 605 164 1 577 539 108 Asia 45 590 448 23 089 008 13 918 898 97

Europe 26 345 700 18 715 897 14 560 094 41 Latin America and Caribbean 9 707 743 7 118 894 4 819 294 36

North America 14 807 741 15 626 951 13 269 645 -5 Oceania 1 029 037 607 385 408 041 69 Developing countries 56 475 671 30 005 952 17 814 199 88 Developed countries 46 413 982 37 757 347 30 739 312 23 Total 102 889 653 67 763 299 48 553 511 52

Source: World Bank (2000); UNESCO Institute of Statistics (2004). pursued government-led education (in India 3. International trade in higher nearly all tertiary education is publicly funded), in education services others (Chile) more than 70 per cent of the total amount spent on higher education comes from private sources (OECD–UNESCO, 2003). This is Higher education has value for individuals, insti- by no means uncontested – particularly by stu- tutions, States and other associated service pro- dents who are now expected to pay (higher) fees viders (e.g. academic publishers). OECD coun- and by staff who have seen their pay and work tries’ trade in educational services was around conditions casualized. $30 billions in 1999, equivalent to 3 per cent of their total export services (Larsen et al., 2002). The five major exporters of educational services Besides teaching, research is the second main activ- in 2000 (all in millions of dollars) were the ity in which universities engage. The capacity to United States (10,280), the United Kingdom undertake original research is also fundamental to (3,758), Australia (2155), Canada (796) and New higher education institutions and society in gen- Zealand (199). eral. Research capacity attracts funding (from the private sector, Governments and foundations) and International trade in higher education services adds to the reputation of an institution, which it takes place through the following four modes of can then translate into increased demand by stu- supply: (i) cross-border supply: the provision of dents and the ability to charge higher fees. online degrees to students in another country; (ii) Research is validated through publications. Cur- consumption abroad: students move abroad to rently, the system of research publishing has one take a course; (iii) commercial presence: a univer- major inconsistency: while university professors sity setting up a campus in another country; and and researchers provide their knowledge for free (iv) presence of natural persons: professors mov- for publication in specialized journals to access ing between institutions in different countries. It research by others they or their universities need is in the movement of students (mode ii) where to pay a subscription for the journal. According to most international trade takes place. In 2001–2002, Oxford Analytica,4 the six largest publishers pub- there were over two million students studying lish 40 per cent of all scientific, technical and med- abroad (UNESCO, 2004), and chart 4.3 provides ical journals, and Reed Elsevier alone leads with 25 an overview of where those students came from per cent of the market. The prices for traditional and where they went to study. The net exporter journals have been rising sharply for several years, regions are North America, Europe and Oceania, increasing the gap between those who can afford while net importer regions are Asia, Africa and access to information and those who cannot. South America.

E-COMMERCE AND DEVELOPMENT REPORT 2004 100 CHAPTER 4: ONLINE HIGHER EDUCATION: ISSUES FOR DEVELOPING COUNTRIES

Chart 4.3 multilateral negotiations in education progressing Number of foreign students in at a slow pace and those Governments driving for higher education, by hosting region and open education markets (e.g. the United States) region of origin, 2001-1002 taking advantage of other options such as bilateral agreements.

Proponents of liberalizing the higher education market claim that increased competition will lead to more choice and increased quality through facilitating educational institutions’ access to foreign markets by providing individuals with a wider choice of educational services, by increasing opportunities for teachers to work abroad and by increasing competition and thus reducing prices for students. Governments promoting the liberalization of education include those currently leading in the export of educational services and with a strong private education market in the English language, such as the United States and Australia. Under the current round of GATS multilateral negotiations (2000–2005) only four countries (United States, Australia, New Zealand and Japan) have provided a negotiation proposal. Interest- Source: UNESCO (2004). ingly, the United States, Australia and New Zea- land are significant producers of e-learning materi- Data on the exports in the other modes of supply als and distance education packages and are the are practically non-existent, but the size of such main exporters of educational services. In addi- exports is thought to be limited. For example, tion, the export of educational services for Aus- Larsen et al. (2002) estimate that in 2000 there tralia, New Zealand and the United States were 6,250 foreign distance learning students at amounted to 11.8 per cent, 4.7 per cent and 3.5 per Australian universities, corresponding to 6 per cent of all services exports. cent of all foreign students. In the United King- dom, the Open University (the largest UK dis- Opponents of liberalization argue that the open- tance education provider) currently has 28,381 ing up of educational services undermines public 5 overseas distance students, while the country provision, and can hinder the quality, relevance received a total of 225,722 foreign students in and equality of access to education. Leaving the 2001–2002 (UNESCO, 2004). provision of education to market forces may provide more flexible outcomes, better adapted to the International trade in educational services is not skills that the market demands at lower prices. new: selling educational services, studying abroad However, it is argued that these potential gains and establishing educational institutions are con- will be at the cost of alienating non-commercial ventional features of academic life. What is new is education, eroding local cultures and creating a the impetus (at least in some countries) to further two-tier educational system where only those liberalize the education sector, and the responses with sufficient resources will be able to pick and by other actors such as teachers, students and edu- choose from a menu of competing global cation managers to this opening up of the educa- providers. tion market. Higher education services are subject to progressive liberalization under the General In summary, there is a consensus that globaliza- Agreement on Trade in Services (GATS). The tion and liberalization are placing new demands GATS is flexible in the sense that countries can on, and posing new challenges to, equitable access tailor commitments to specific modes of supply to higher education as well as promoting the and can even leave entire sectors (i.e. education) emergence of competition in knowledge provi- without any commitment. Thus, in the contested sion, and creating the need for new quality assur- context described below, it is no surprise to see ance approaches (see box 4.2). Liberalization also

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 4: ONLINE HIGHER EDUCATION: ISSUES FOR DEVELOPING COUNTRIES 101

Box 4.2 The effects of the internationalization of education

CONSENSUS DEBATE New demands on higher education Erosion of role of nation State Emergence of competitors in knowledge provision Private HE: Threat/opportunity or norm? Challenges to access and equity Mobility vs. brain drain Need for new quality assurance approaches Unbundling of academic functions

Source: UNESCO (2001). raises questions about Governments’ ability to dis- Online higher education provides different bene- criminate between national and international profits and opportunities for students, higher educa- viders of education as well as between domestic or tion institutions, Governments and educational foreign students. The changing role of Govern- service providers. By analysing these different fac- ments in this regard will have an impact on the tors we have identified six key drivers responsible autonomy of individual higher education institu- for the current adoption and promotion of online tions and on the role that Governments play in higher education in developing countries: first, to regulating higher education. Liberalization also develop educational capacity; second, to improve reinforces private provision, which exacerbates quality; third, to increase access to higher educa- inequality in low- and middle-income countries, tion; fourth, to raise revenue; fifth, to enhance the where only a limited percentage of the population uptake of ICT skills and infrastructure, so as to can afford private education. Finally, the interna- promote a knowledge economy; and sixth, online tionalization of education provides many benefits higher education is a survival and marketing by further enhancing the mobility of students, strategy. such as wider options for qualified students and exposure to different cultures. However, it is also Each stakeholder has different needs and priori- one of the processes that can lead to “brain drain”, ties. For example, established universities with with competent students leaving their countries of high brand recognition are using online education origin and taking their skills with them. There is to capitalize on their existing reputation and to also the potential for middle-income counties with expand enrolments. National Governments are well-developed higher education institutions to funding new virtual universities through public/ attract overseas students by entering into price private partnerships so as to find ways of expand- competition with established universities in devel- ing access to education without a significant rise in oped countries. The supply and consumption of the education budget. Not every stakeholder these services might be an interesting topic for accepts the validity of all six drivers, neither from discussion in the context of South–South co- the economic nor from the educational point of operation. view. For example, it can be argued that investing in online education may not be the best way of increasing either capacity or access and that tradi- C. Online higher education tional distance education may well cover this objective more effectively. Nevertheless, there are (as already stated) six main drives of online higher 1. Why are developing countries using education. They are described below. online higher education? 1. To develop educational capacity. The Internet makes it possible to reach more people Given the above debates about access to and provi- over a wider area with limited access to traditional sion of higher education, the introduction of education in general or to specific higher educa- online higher education in the current context tion institutions. In this sense, online higher edu- raises many questions. cation is an extension of the distance learning

E-COMMERCE AND DEVELOPMENT REPORT 2004 102 CHAPTER 4: ONLINE HIGHER EDUCATION: ISSUES FOR DEVELOPING COUNTRIES

Box 4.3 Virtual University of Pakistan

“The driving force for the Virtual University [was] a nationwide shortage of quality faculty in…higher education. ICT was the only way to overcome these issues.” The Virtual University of Pakistan emerged from a study carried out in 2001 by the Ministry of Information Technology in Pakistan on the feasibility of online university education. The driving force behind the university is the lack of academic faculty, in particular in IT. Quality staff can be found in only a few elite institutions where access is not easy and the cost is beyond the reach of the average citizen of Pakistan. The Virtual University brings together faculty and content onto a single platform that is more accessible and less costly than conventional education. The Virtual University also creates original content, which it makes available to other institutions via an Intranet. It also offers professional development courses in order to disseminate knowledge and expertise and make them more accessible.

Source: UNCTAD e-learning questionnaire survey response, 2004.

model. For example, the United Kingdom’s Open 3. To increase access (particularly for margin- University has long been providing distance edu- alized populations). E-learning can be used to cation for UK and non-UK students, and it is now provide innovative solutions to address specific incorporating new technologies in the dissemina- access issues that might make it difficult for poten- tion of education (see annex I). The arrival of the tial students to participate in higher education. Internet has brought additional access at a distance For example, the University of Palestine has in the sense that most traditional and well-known attempted to use an element of online learning to universities did not engage in distance education, enable students to interact with tutors when they whereas they may do so now through online are physically unable to reach the university delivery. An example of a new institution that has because of roadblocks and other security measures been set up to increase capacity as a motive for in Gaza.7 investing in e-learning is the University of Paki- stan, as explained in box 4.3. 4. To achieve cost-efficiencies. The possibility of e-learning to expand capacity and access 2. To improve the quality of learning.There brings with it potential cost-efficiencies (reaching is a strong argument that the use of ICTs can more students for less money) through reducing increase the effectiveness and quality of learning the cost per unit (or student) and therefore by providing increased customization, more flexi- improving an institution's financial position. For bility and student choice. In the UNCTAD sur- many developed country institutions whose budg- vey, the Virtual University of Monterrey empha- ets have been reduced and which are facing sizes the pedagogical benefits of e-learning: (a) it increased domestic competition for funding, the promotes the development of skills and attitudes, potential to expand their market globally through in addition to subject area knowledge; and (b) it virtual campuses and other e-learning ventures has offers students the possibility of extending their been a strong driver. However, the argument that learning (via links, databases, etc.). However, online education provides economies of scale, and teachers, students and employers have long con- thus cost-efficiencies, is contested. Depending on tested the quality of online education, and there is the infrastructure available, the initial start-up a widespread perception that online degrees are of costs may be high and, if quality is to be main- a poorer quality than those based on traditional tained, the cost reduction per additional student study. In contrast, as part of a wider lobby pro- numbers will be minimal. Thus, investing in moting the values of ICTs and the Internet, there online education solely for the sake of cost-effi- are groups, within both the educational and the IT ciency is a high risk for any provider. In addition community, that assert the value of e-learning in to economies of scale, the application of ICTs to raising educational standards and effectiveness.6 education does provide other potential economic

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 4: ONLINE HIGHER EDUCATION: ISSUES FOR DEVELOPING COUNTRIES 103 advantages: from the possibility of reselling educa- ernment to promote online higher education: (i) tional content to third parties to opportunities to the belief that it can help bridge the digital divide, increase administrative efficiency, and from better within and between countries, and (ii) the desire student management systems and access to better to promote local content for domestic use and for information for decision-making to improved export. communications. In today’s globalized information society, falling 5. To enhance the uptake of ICT skills and behind in access to and use of ICTs (often referred infrastructure, so as to promote a knowledge to as the digital divide) can lead to lost economic economy. Perhaps the key driver for online edu- and development opportunities, and can exacer- cation at the macro-policy level is that it will bate existing inequalities between and within enhance ICT skills and infrastructure, and thus countries. To overcome this digital divide, it is serve to reinforce the promotion of a “knowledge necessary to develop ICT infrastructure and skills economy”. Developing an e-learning strategy can as well as an understanding of the appropriate use complement other national ICT policies. Indeed, and application of ICTs relevant to different needs there are synergies between different sectors. For and contexts. However, unless underserved popu- example, in the United Kingdom, the Department lations (including rural, women, disabled and of Trade and Industry has targeted educational lower-income students) are consciously and pro- and training services – in particular online educa- actively targeted, any national digital divide will tion – as a key area for overseas export. The increase. Using online education to bridge the dig- export potential of UK education is underpinned ital divide is an attractive proposition, but it will by national investment by the Department for only happen if a coherent inclusive strategy is put Education and Skills in creating a market for in place together with the necessary resources. online material through measures such as e-learn- Partnerships with private enterprises can partially ing credits. One of the potential benefits for Gov- alleviate resources restraints. Currently, interna- ernments in adopting an e-learning strategy is that tional donors, private enterprises and other play- it can promote the use of ICTs and contribute to ers have a strong interest in investing in online the development and use of ICT infrastructure education. (universities are early adopters of ICTs). Moreo- ver, it can provide a market for related industries, In the information society, information obviously including software, content development, media has essential value. Economies are increasingly and other educational services. dependent on both the information that is available to them and the resources with which to use it. 6. Because it’s there: survival and marketing But for this information to be valuable, it has to strategy. There is also the perception that e- be relevant to the user, and to the latter's context learning is worth investing in because, to some and purpose. This applies to every user, from the degree, it represents “the future” and if some insti- savvy IT student to the basic reader, for every con- tutions have e-learning capacity, then other uni- text, from the international market to a small versities need to invest in order to be able to com- rural community, and for every use and sector pete. For example, in response to the question from services to agriculture. One of the concerns about motivation for e-learning the University of about the proliferation of online education is the Jzvaskyla, Finland, replied “necessity…because of dominance of developed countries in producing European development and Bologna processes in and disseminating content and information: most higher education”.8 Similarly, Monterrey Univer- Internet content is in English and originates in sity makes a selling point of using the most up-to- developed countries. The effects can already be date technologies available: “(the university) uses seen: citizens are unable to access relevant infor- the most advanced technological, multimedia, and mation because it is in a language they do not audiovisual resources for instruction”.9 understand, is irrelevant to their context and incompatible with their existing level of technol- Governments’ economic and cultural rationale ogy and skills. Given that professional content is largely created and shared through universities, In addition to the above-mentioned drivers of online higher education offers an opportunity for online higher education, we should add two addi- national Governments interested in devoting tional economic and cultural rationales for a Gov- efforts and resources to the creation, promotion

E-COMMERCE AND DEVELOPMENT REPORT 2004 104 CHAPTER 4: ONLINE HIGHER EDUCATION: ISSUES FOR DEVELOPING COUNTRIES and use of local content. New initiatives such as higher education. With online education new open content and open source (see section on tech- stakeholders have entered the higher education nology) are putting in place some of the necessary market (such as ICT providers – both of infra- frameworks for the open sharing of information. structure and of applications), and the bargaining power (that is, the importance and power of a given actor within the market) of existing stake- 2. The online higher education market holders has changed. Potentially, teachers are losing influence to software developers who create Online higher education is a potentially profitable structures and systems for teachers to fit their con- 10 global market. The OECD predicted in 2001 tent into. Some students can have increased power that there will be 30–80 million online students in because they can now choose among different edu- the world by 2025. The online higher education cational providers, even without leaving home. market is composed of goods and services that include software applications that enable interac- Any projection about the size of the online mar- tion via the Internet, course content, support serv- ket has to be treated with caution since only a lim- ices (such as accreditation or education manage- ited number of official statistics include specific ment) and the actual dissemination of education indicators on the use of online education and there (e.g. the interaction between teacher and stu- are not yet internationally comparable indicators. dent(s)). In addition, online higher education Most indicators related to ICTs and education requires products not restricted to the specific have been produced for e-learning in general, for online higher education market, such as ICT infra- primary and secondary education (such as the structure. Table 4.2 presents an overview of the number of computers per students) or for the cor- different stakeholders and interests in online porate market, and this leaves a large information

Table 4.2 Framework of e-learning in higher education: Main uses and stakeholders

Areas of investment Stakeholders Course delivery and Content and ICT Accreditation Students with example ICT infrastructure administration applications services (fees, subsidies) National Governments X X X X E.g.: UK Public university XXXXX E.g.: Indira Gandhi Open Univ. Private university X X X X X E.g.: Univ. of Monterrey ICT Infrastructure/ telecoms X sector E.g. Cisco ICT applications sector X X X X E.g: Web CT Media and publishing X E.g.: BBC University staff X X X X Professors and support Students XX as consumers* Educational services providers, X X X e.g.: EdExcel International community XXX X e.g.: donors / foundations

* Students have a dual role as both the consumer of educational services and an area for investment. Clearly, different kinds of students have varying degrees of power and autonomy – not least, a different ability to pay international fees.

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 4: ONLINE HIGHER EDUCATION: ISSUES FOR DEVELOPING COUNTRIES 105

Table 4.3 E-learning readiness ranking, 2003

Score (of 10) Rank Score (of 10) Rank Score (of 10) Rank

Sweden 8.42 1 Italy 7.07 21 Romania 4.91 41 Canada 8.4 2 Spain 6.98 22 Venezuela 4.82 42

United States 8.37 3 Japan 6.53 23 Philippines 4.8 43 Finland 8.25 4 Greece 6.52 24 Russian Fed. 4.65 44

South Korea 8.24 5 Malaysia 6.48 25 India 4.56 45 Singapore 86Israel 6.34 26 China 4.52 46 Denmark 7.98 7 Portugal 6.33 27 Saudi Arabia 4.5 47 United Kingdom 7.93 8 Chile 6.13 28 Ukraine 4.38 48 Norway 7.91 9 Czech Republic 6.11 29 Ecuador 4.38 48 Switzerland 7.72 10 Hungary 6.09 30 Turkey 4.33 50 Australia 7.71 11 Mexico 5.96 31 Egypt 3.98 51

Ireland 7.6 12 Argentina 5.86 32 Kazakhstan 3.79 52

Netherlands 7.59 13 Poland 5.73 33 Indonesia 3.67 53 France 7.51 14 Brazil 5.63 34 Azerbaijan 3.67 53

Austria 7.49 15 Slovakia 5.51 35 Sri Lanka 3.66 55 Taiwan P of C 7.47 16 Thailand 5.11 36 Algeria 3.52 56

Germany 7.45 17 Peru 5.1 37 Viet Nam 3.32 57 New Zealand 7.37 18 Colombia 5.05 38 Pakistan 3.22 58

Hong Kong (China) 7.34 19 Bulgaria 5.04 39 Islamic Rep. of Iran 3.06 59 Belgium 7.19 20 South Africa 4.96 40 Nigeria 2.82 60

Source: Economist Intelligence Unit (2003a) gap in online higher education. Thus, current esti- Internet, including attitudes and overall level of mates on the impact of online higher education education). Within each category the assessment is are based on these other variables or on the impact based on four factors that make e-learning possi- of the distance education market. ble: connectivity – “the quality and extent of Internet infrastructure”; capability – “a country’s The Economist Intelligence Unit ranking (2003a) ability to deliver and consume e-learning, based on grades 60 countries according to their e-learning literacy rates, and trends in training and educa- readiness. In other words, it ranks countries on tion”; content – “the quality and pervasiveness of their ability to produce, use and expand Internet- online learning materials” and culture – “behav- based learning – both informal and formal, at iours, beliefs and institutions that support e-learn- work and at school, in government and through- ing”. Although the ranking examines a broader out society. This ranking assesses e-learning on the sector than higher education, it does provide some basis of four categories: education (Internet access kind of map of the state of e-learning internation- and use among teachers and students, including ally. Among the leaders are the Nordic countries, equality considerations), industry (use in different the United States and Canada, the United King- sectors), government (its support for e-learning) dom, Switzerland, Australia and East Asian tigers and society (populations’ access to and use of the (Republic of Korea and Singapore). All these

E-COMMERCE AND DEVELOPMENT REPORT 2004 106 CHAPTER 4: ONLINE HIGHER EDUCATION: ISSUES FOR DEVELOPING COUNTRIES countries are recognized as having strong educa- Japan's Ministry of Public Management (2002) tional systems and high levels of ICT penetration, puts the value of Japan's e-learning revenues in as well as a competitive market. They are then fol- 2003 at $770 million. According to NetLearning,13 lowed by other European countries and other the Japanese e-learning market is a small propor- Asian countries. In the middle ranking there are tion of that in the United States, only one thirti- some of the most developed Eastern European eth. In particular, the value of the corporate e- countries (Czech Republic, Hungary, Poland and learning market was $290 million in 2003. This is Slovakia), as well as the most developed Latin a great difference, even when the fact that Japa- American nations (Chile, Mexico, Argentina and nese GDP is only half of United States GDP is Brazil). These countries have in general benefited taken into account. from government policies and from a commitment to exploring different ways of funding In Canada there is a strong higher education mar- ICT investment. Counter-intuitively, given their ket both for English-speaking and for French- strong investment in ICTs, South Africa only speaking students, and Canadian education has a ranks 40th, and surprisingly India and China, good international reputation. Athabasca Uni-ver- despite their large distance education markets, are sity, which is regarded as the Canadian Open Uni- towards the bottom of the rankings. Given the versity, claims to be the first to offer an online limitations of the data presented we can judge that MBA and currently hosts over 30,000 students India’s high score in the industry category is (both online and at a distance). brought down by low scores in the other categories, while China’s score is particularly low in the In Australia all universities are engaged in online education category. education to some extent, and 207 courses are fully online. Australia is a regional leader for According to IDC analysts,11 the corporate e- higher education, able to attract Asian students learning market was valued at $6.6 billion in 2002, looking for education in English close to home. of which $5.2 billion was in the United States. For example, Australia increased the share of This figure is expected to rise to $23.7 billion in international students studying in Australian post- 2006. The expansion of e-learning in corporate secondary institutions through distance learning organizations benefits from, among other things, and offshore programmes from 18 per cent to 35 having available ICT infrastructure, having per cent between 1997 and 2001 (OECD–CERI resources for training, and in the case of interna- 2002). tional dissemination of e-learning the opportunity to save on travel costs. Much of the literature The United Kingdom has a long tradition of dis- agrees that for a wide range of policy reasons, such tance education, for example the Open University as equality motivations or ability to raise funds, (see annex I), and is further promoting e-learning financial returns in higher education are not as and online education in its national and interna- secure as they are in the corporate e-learning mar- tional market. Despite the uncertainty surround- ket. Thus we can expect the size of the online ing the UK eUniversity programme, a govern- higher education market to be smaller. ment-backed initiative to market online courses of UK universities abroad (see annex I), other univer- From this analysis, it is clear that the United sities are investing heavily in international online States is the market leader in the use and export of education. For example, the University of Liver- online higher education. With an estimated 80 per pool has signed a 10-year agreement with Sylvan cent share of the corporate e-learning sector, it is Learning Systems (a large US higher education expected to have a high market share in the online company) to provide its courses online. higher education market. The Sloan Consortium estimates that in the autumn of 2002 over 1.6 mil- In Eastern Europe, online education is patchy. lion students in the United States took at least one The good higher education infrastructure is not online course, which represents 11 per cent of all always matched by extensive access to and use of US students. Over one third of those students ICT. Nevertheless the newcomers in the Euro- (578,000) took all their courses online. Moreover, pean Union expect that accession will help mini- Worldwidelearn12 cites a report by Capella Uni- mize major obstacles such as expensive ICT hard- versity estimating that “distance learning is ware and the scarcity of quality content, limited expected to increase in the US by 900 percent to digital literacy and language skills. Know-how for include 750,000 students fully online by 2005”. the future includes experience in government pub-

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 4: ONLINE HIGHER EDUCATION: ISSUES FOR DEVELOPING COUNTRIES 107

Box 4.4.

Bolivia wants a national policy on virtual education

“In Bolivia, unfortunately, there is no national policy to tackle the challenges of distance education in public universities, although we know that there have been some sporadic and isolated attempts. On the other hand, private educational institutions are still just consolidating their space in the university system in traditional terms.” The main challenges and hurdles that this form of learning (online) has to confront in Bolivia are “a truly diversified incomprehension of what virtual education means. Bolivian society in general and the education community in particular are very conservative, deeply reticent about changes, about adapting to the new courses and to opportunities for studying, and about being trained and informed. Another big hurdle is at the level of technological infrastructure and access to such infrastructure by the majority of the students.” These circumstances could be avoided “with greater information and promotion of the use and potential of virtual education through, and not primarily by, the Ministry of Education. It will be necessary to combine with State policies that allow countries on the continent to aggressively promote the use of new technologies to the benefit of education.” Garret Aillón, Rector of the Andean University Simon Bolivar, at the inauguration of the first virtual experiences in its Centre for Distance Education.

Source: Translated and adapted from www.elearningamericalatina.com.

lic–private initiatives in e-learning as well as inter- to benefit from e-learning and even less from national collaboration at the higher education online education. The example of Bolivia (box 4.4) level. For example, Hungary has one degree – in provides a useful corrective to some of the claims law – offered fully through the Internet, by the about higher education by illustrating many of the Pázamány Péter Catholic University,14 and the challenges that some countries face regarding Government of Hungary is proposing a searcha- online education. ble database of learning material.15 In Asia, online education is growing in the richer In Latin America and the Caribbean, the Monter- and more technically advanced developing coun- rey Virtual University (an offshoot of the offline tries. For example, in Malaysia there are two insti- Monterrey University) has been able to establish tutions playing a leading role in the regional itself as a market leader (see section 4). Countries online higher education market: UNITAR (Uni- such as Argentina, Chile and Brazil are popular versiti Tun Abdul Razak), a private virtual univer- destinations for private e-learning enterprises. sity offering 20 academic programmes in the field There are already a number of online courses of business, IT and social sciences to more than from US providers such as the University of Phoe- 8,000 students at 11 study centres in Malaysia, nix, UNext and the Monterrey Virtual Univer- Cambodia and Thailand, and MUST, the Malaysia sity, as well as a limited number of traditional uni- University of Science and Technology (see section versities offering online courses. An example of 3.4), a private research institution set up in collab- the latter is the Universidad Virtual de Quilmes in oration with the Massachusetts Institute of Tech- Argentina, which in collaboration with the Uni- nology. In contrast, India and China have a long verstitat Oberta de Catalunya in Barcelona, has tradition of open and distance education, with launched a private virtual university. In Peru, the experience in the application of technologies to Inter-American Development Bank backed the education, such as satellite and radio, but for the Instituto Tecnológico Superior, a private business moment online higher education is only starting and technology school, to develop virtual profes- to be developed. sional training programmes.16 These are not formal higher education courses, but seven-week In Africa there is the African Virtual University, courses. Their success confirms that with the nec- originally created by the World Bank and now a essary backing, online education can be successful donor-led and mixed distance/e-learning initiative. in attracting students. But countries that are less For French-speaking countries there is a specific developed (whether in terms of technologies or initiative funded by the Francophonie: the Cam- higher education in general) are finding it difficult pus Numérique Francophone, which establishes

E-COMMERCE AND DEVELOPMENT REPORT 2004 108 CHAPTER 4: ONLINE HIGHER EDUCATION: ISSUES FOR DEVELOPING COUNTRIES

ICT-equipped centres to promote the use of Kingdom, have long been using technology in a online learning in universities in French-speaking number of ways (radio, TV, videocassettes) to West Africa (including in Dakar, Senegal; Cot- deliver courses at a distance. The transformation onou, Benin; and Lomé, Togo). Additionally, from distance to online education is a more natu- there are a multitude of donor-led educational ral evolution: instructors are familiar with teach- projects, focused on bringing new technologies ing at a distance, the university already has a struc- into African education, such as teacher training in ture to develop course materials, and students are South Africa. used to interacting with teachers and one another across space and time. In marketing terms, online However, the adoption of online education has delivery has given more credibility to distance not been entirely successful. Dramatic failures education, which has often been seen as second have already been hitting the headlines: best to traditional, face-to-face higher education. It Hawkridge (2003) cites, among others, Fathom seems that Governments are more inclined to pro- ($40 million), a Columbia University initiative; vide funding for online projects than to fund dis- New York Online ($20 million) from New York tance education. For example, according to Tu University; Temple University, which shut down and Twu (2002), in Taiwan Province of China the its business without offering a single course; and Government was assigning between $3,125 and the UK Open University initiative to establish $9,375 for a traditional university student, while itself in the United States (£9 million). Addition- the expenditure for a distance education student is ally, the latest disappointment in online interna- $625. tional higher education has been the UK eUniver- sity (see subsection 5). The reasons for these One of the trends we have seen in higher educa- failures are varied, including problems of accredi- tion is the growth of private providers and an tation, lack of transparent governance and above increasingly blurred division between private and all the failure to sell the product and attract public provision. In the United States, with its enough students. These examples prove that the particular pattern of private higher education, availability of funding and resources does not only 4 to 5 per cent of all students are enrolled guarantee the sustainability of a project. with for-profit providers. However, 33 per cent of all online students are enrolled with the same pro- Trends in the online higher education market vider (Howell et al., 2003). It would seem that private for-profit interests are leading in providing As we have seen, most developing countries are online educational services. Additionally, several progressively introducing ICT into their educa- public institutions are providing online education tion systems subject to the availability of Internet through a for-profit institution, such as the failed infrastructure and ICT skills. The use of the Inter- New York University Online initiative. As in net for higher education is still very limited, but offline education, alliances between for-profit and technology in general has long been used to pro- not-for-profit organizations, and between private vide education, both through computers in and public institutions, provide strategic benefits schools and through distance education. The dif- but also carry governance and sustainability risks, ference between offering one course online and a as well as access, equality, quality and ownership full degree online is also becoming more relevant implications. for students. Universities that want to be able to reach students at a distance are making every effort to deliver full degrees online or to promote 3. The Internet’s impact on the inter- recognition of their individual courses so that the national trade in higher education courses can count towards degrees of other universities (thus reinforcing a process of modularization). The opening of trade in educational services is sur- rounded by uncertainty and current data are insuf- Online higher education in many cases evolves ficient to provide an accurate picture of the value from distance education. Open universities (public of international trade in online educational serv- universities with minimal or non-traditional entry ices. Nevertheless, some hypotheses about the requirements for students, often providing educa- impact of the Internet on the international trade tion at a distance), such as in India and the United in higher education can be formulated.

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 4: ONLINE HIGHER EDUCATION: ISSUES FOR DEVELOPING COUNTRIES 109

The Internet is promoting international trade in dents (for example, the number of online courses higher education services by facilitating the dis- that an international student can take while study- semination of educational content and services ing in the United States so that they count for visa through online distribution. Paulsen (2004) indi- purposes has been drastically reduced). cates that there are 200,000 courses available on the Internet. Whether this is an exaggeration or The application of ICTs to education is allowing reality, it gives a flavour of the enormous variety for the unbundling of academic functions, which of online educational supply. in turn promotes international trade in educational services by fostering specialization and cus- Online education is also promoting trade in other tomization of educational services. The unbun- modes of supplying higher educational services, dling of academic functions occurs when multiple such as the movement of students and commercial players intervene in the education supply chain: presence. Online educational providers generally one party may create the course content, another need to work with, or are requested to set up, a delivers it, a third institution manages the local subsidiary to better support students and resources, another provides the accreditation, and market their programmes as well as for assessment so on. The drawback to the unbundling of aca- purposes. Moreover, blended learning is in many demic functions is that it challenges ownership cases becoming a preferred mode for engaging in and control of the educational service, and can education. consequently jeopardize its quality.

Online education offers an additional mode of The Internet is also increasing trade in higher edu- entry to educational institutions that want to pro- cation services by facilitating the reuse and resel- vide their services in countries with protective ling of higher education resources to serve the life- educational markets. It should be noted in this long learning needs of the information society. In regard that developed countries are the major a rapidly changing, technology-dependent econ- exporters of online higher education services, and omy, lifelong learning has become increasingly developing nations are the net importers of such important for ensuring the necessary and continu- services. Given that few countries have regulations ous updating of skills (languages, professional covering the provision of online services by for- skills etc.). As a consequence, the rise of lifelong eign entities, online education can be a more learning is accelerating the convergence of differ- attractive option for foreign suppliers to offer ent educational sectors, including corporate train- higher education services in a given country. If ing, higher education and the “other” key sector national Governments limit the establishment of in international education (language training). As commercial education providers, the Internet the Internet is already widely used in the corpo- makes it possible to circumvent regulatory barri- rate training sector, one might expect its use in ers (UNCTAD, 2002a). higher education to further facilitate the reuse and trade of educational services from one sector to Online education is becoming an option for stu- another. dents who have difficulties in travelling abroad, and this is particularly relevant for citizens from developing countries. Multiple forces are shaping 4. Models of online higher education the direction and numbers of students crossing borders. In general, more restrictive entry regulations for students favour online education or On the basis of an UNCTAD survey of e-learning other international and regional markets. The pas- in higher education carried out in January–March sage of the US Patriot Act has been linked to a 2004 on a small sample of universities currently decrease of up to 30 per cent in the number of engaged in, or planning to invest in, online educa- international students enrolled in US colleges and tion, we have identified five different models of universities (Jaeger and Burnett 2003). This could how online higher education is being adopted. promote other destinations, such as Australia or These models illustrate the different strategies the United Kingdom, and online education. But being followed in developing countries for provid- travel restrictions can also jeopardize online edu- ing online higher education. cation. A large number of online courses still require attendance at short workshops, and visa Examples from this survey have been used through- regulations tend to discriminate against online stu- out this chapter to analyse the key issues in terms

E-COMMERCE AND DEVELOPMENT REPORT 2004 110 CHAPTER 4: ONLINE HIGHER EDUCATION: ISSUES FOR DEVELOPING COUNTRIES of the opportunities and challenges for developing port network of regional centres and staff. With a country Governments and higher education insti- total budget of $14 million, the cost to deliver tutions in pursuing online higher education. Annex their online provision is $200,000. The institution I provides a full summary of the survey. buys pre-existing content from other institutions that specialize in particular educational disciplines. Traditional university going online For example, IGNOU has entered into collaboration with the EDEXEL foundation in the United University of Monterrey, Mexico; Mauritius Uni- Kingdom, whereby some of the pre-existing con- versity; National University of Lesotho tent of the institution is used for the online IGNOU Bachelor in Information Technology Established traditional universities are increas- and Advanced Diploma in Information technol- 18 ingly using e-learning to deliver and support some ogy. IGNOU also creates its own content. courses. A number of universities are already providing some courses completely online in addition Independent online courses to the traditional courses they offer. LEAD, United Kingdom; UN University; A well-known case is the Virtual University of the UNCTAD TrainForTrade Instituto Tecnológico de Estudios Superiores de Monterrey (ITEMS), one of Latin America’s most This model of online higher education refers to prestigious private universities. ITEMS has long stand-alone online courses or programmes that are experience in using ICTs to provide courses and is part of general educational provision or a capacity famous for its television-based distance education. development initiative. These courses may be pro- In the late 1990s it started to incorporate the Inter- vided by universities or by other non-traditional net into its teaching and today many of its post- capacity-building institutions. Particularly in the graduate degrees are offered primarily online, with case of non-universities these courses often do not satellite television as a supplement. In 2001 the provide formal accreditation. university had more than 1,200 students studying exclusively online, and around 12,000 students UNCTAD’s TrainForTrade programme aims at using blended programmes.17 The policy of the training government officials on key trade issues. Virtual University is to offer all of its courses Such courses seek to expand the impact of the online as from 2004. organization by providing training and developing capacities through the application of ICTs to Open and/or distance university going online training. Courses are developed in conjunction with specialized staff of the organization, and are Indira Gandhi Open University, India; UK Open delivered using online techniques. The pro- University gramme is largely based on donations from Governments. Open universities and distance learning universities have long experience in providing distance Consortiums of institutions providing access to education using ICTs to support and/or replace online learning face-to-face course provision, including television and radio broadcasting, cassettes and videocas- Finnish Virtual University; UK eUniversity; settes. These universities are taking further steps Malaysia University of Science and Technology; in the use of media technology, using the Internet Massachusetts Institute of Technology, United to provide education. States

The Indira Gandhi Open University (IGNOU) Online higher education can also be provided caters to the Indian market and is currently serv- through international e-learning partnerships ing 10,000 students online out of a total of 334,415 between developed and developing country insti- students. It has a history of broadcasting educa- tutions. This model has the potential for the trans- tional content, and has strategic partnerships with fer of know-how and technology. Doordashan, India’s National Broadcaster and All India Radio. Its major strengths reside in the large The Malaysia University of Science and Technol- domestic market, and an already established sup- ogy (MUST)19 was conceived and planned as a

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 4: ONLINE HIGHER EDUCATION: ISSUES FOR DEVELOPING COUNTRIES 111 world-class university to cater for the needs of the the economic failure of the online education enter- science and technology sector in Malaysia. The prise. Lack of clear governance also impacts on the establishment of MUST was announced in 1997 achievement of the initial educational or develop- just before the regional economic downturn of mental aims. Public institutions setting up a pri- 1998. This slump significantly hampered the vate enterprise to deliver online education have establishment of the university. However, the idea found that sooner or later the organizational cul- was resurrected in December 2000 after MUST ture has an impact on the management and con- received financial assistance from the Government trol of the newer initiative. Every initiative has to in the form of a conditional grant to train highly negotiate the different professional values and skilled researchers and scientists for Malaysia. practices of educators, ICT professionals and edu- MUST is a research-driven university focused on cational managers. Governance issues also arise in postgraduate training that aims to attract the best consortiums where multiple actors join forces and students from the South-East Asian region. It is a have to negotiate different objectives, collaborate private organization that benefits from collabora- and use joint resources. Open universities face tion with the Massachusetts Institute of Technol- lower cultural barriers to the management of these ogy (MIT), which provide human resource and changes, given the fact that online provision is car- curriculum development support. MUST confers ried out within the existing structure. its own degrees but benefits in terms of reputation from the association with MIT. 5. Investing in online higher education “Start-up” online university As with any public investment in ICTs the most substantial objections to online education arise Arab Open University; Virtual University of from the opportunity cost of investing in ICTs Pakistan; Virtual University of Small States of the and not in other programmes judged to be more Commowealth. vital. Four criteria help determine financial decisions for any investment, including online higher In some cases completely new online universities education: profitability, affordability, sustainabil- are being created. In developing countries, ity and efficiency. national or regional governments have promoted such universities, which are quite a new phenome- The most common question regarding the profita- non in these countries. bility of online education is whether it is cheaper than traditional education. A starting point for For example, the Commonwealth of Learning is answering this question is to examine the cost struc- currently developing the concept of a Virtual Uni- ture of e-learning courses. Traditionally, studies versity of Small States of the Commonwealth, scrutinizing the comparative value of different edu- with a proposed budget of $21 million for the first cational models (face-to-face, distance and by exten- five years. This project engages small States in sion online education) focused on a cost account- Africa, the Caribbean and the Pacific in a collabo- ancy exercise. Such studies were primarily rative effort to pool resources and knowledge so as concerned with comparing the unitary cost per stu- to build capacity collectively, as well as to increase dent or per course. However, as described above, access to research and development capacity across there are a variety of online education models. national borders, facilitate the exchange of stu- Therefore, unless applied to a specific case, any cost dents and teachers, and recognize one another’s structure analysis can only serve as guidance. Addi- courses so as to provide greater transferability. tionally, this type of analysis is particularly difficult The Virtual University of Small States of the in the field of education, where educational institu- Commonwealth does not count as online higher tions tend to have ill-defined cost centres. education as such, but it is a first step towards using ICTs in higher education. If successful, it The general economic argument for online educa- will lay the foundation for a future infrastructure tion is based on economies of scale. Online educa- in which to offer online learning. tion is potentially cheaper than face-to-face education when a large number of students are targeted. One of the key issues to examine in any model of Theoretically, the additional cost per student is online education is governance. Uncertainties and limited, and therefore a large customer base allows confusion about this issue have too often led to the recovery of the significant investments made

E-COMMERCE AND DEVELOPMENT REPORT 2004 112 CHAPTER 4: ONLINE HIGHER EDUCATION: ISSUES FOR DEVELOPING COUNTRIES on infrastructure and on product development. tors that make the investment in online education For example, the Monterrey Virtual University worthwhile. From the individual point of view claims that online courses are cheaper than face-to- students will be assessing whether their efforts will face courses (see annex I). However, the econo- be remunerated in terms of increased life opportu- mies-of-scale argument has yet to be proved. Some nities, private institutions may look at further uti- large-scale e-learning programmes have failed lizing existing infrastructure, increasing loyalty despite their aim of reaching more customers (stu- and improving the quality of their services, and dents). For example, the UK eUniversity project, educational policy makers will be seeking to which has cost £62 million (approximately $114 increase access and further ICT skills. million) (see annex I), aimed at jointly marketing UK online courses abroad but only managed to Without doubt some institutions in developed recruit 900 students (instead of the 5,000 targeted) countries are enjoying returns on their investment in its first year of operation. Secondly, the eco- in online education, but the potential for develop- nomic rationale for some online educational ing countries may be more constrained. For exam- projects, in particular those on the model of “inde- ple, online provision increases international com- pendent online courses” (as described above), is not petition for students, which in turn has an impact based on economies of scale but on providing valu- on the ability of institutions in developing coun- able knowledge in a specific field and on being tries charging higher prices to non-resident stu- financed by donors and/or users. For example, dents, given their low brand recognition or their UNCTAD’s TrainForTrade programme depends catchment area (students from other low-/middle- on donor funding, the content (and even the soft- income countries in the region). Table 4.4 pro- ware) is developed in-house, and competition is vides some anecdotal examples regarding tuition limited to the search for donor monies. The con- fees of online MBAs, and the difference between tent is highly specialized, and based on the core of the cost for a national and an international the organization’s knowledge. While it provides student. opportunities for the dissemination of knowledge, concerns about self-sustainability, particularly in an increasingly competitive environment, and Affordability, or the question of whether Govern- because of the limits to funding (for example, if the ments, institutions and students can afford online e-learning fashion were to pass), should be education is a related issue that can be overlooked addressed. Thirdly, experience shows that cur- in the profitability criteria. Is the Government’s rently a large number of projects have still not educational budget able to afford the provision of gone beyond (or have failed before finishing) the online education? Would lower-income students pilot phase, and thus it is difficult to judge where be able to access online higher education? It can be full-size projects could be successful. Finally, qual- argued that national Governments’ investment in ity and customization raise doubts about any pos- online higher education is justified when it allows sible economies of scale for online higher educa- the participation of students from lower-income tion. Maintaining an acceptable tutor/student ratio levels. But as we saw in the introduction, online cannot be achieved cheaply without alienating education tends to be associated with private pro- teachers, and customization to local culture vision, particularly in higher education. In some involves a high degree of content and pedagogical cases, such as MUST, the online project has only expertise that requires a significant proportion of gone ahead when the national Government has any budget. been able to confirm funding for all national students participating in the programme. However, there is a broader question regarding the importance of cost: does it really matter if It seems that much of the boom in ICTs in educa- online education is cheaper than traditional education is being promoted by developed economies tion? Interestingly, while in the wider e-learning and that international funding provides a strong literature, reducing costs is seen as a major moti- driving force. However, the capacity of interna- vating factor for institutions, several of our tional funding to finance higher education is respondents actually claimed that online courses rather limited, in terms of both time and the pro- were more expensive than their offline equiva- portion of overall spending. 20 Thus national Gov- lents, and yet they are prepared to invest in online ernments are entrusted with the responsibility of higher education. Therefore, there are other fac- taking crucial financing decisions for higher educa-

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 4: ONLINE HIGHER EDUCATION: ISSUES FOR DEVELOPING COUNTRIES 113

Table 4.4 Comparative tuition fees for online MBA: Foreign vs. national students

Tuition fee for international Tuition fee for national students ($) students ($) Difference Developed countries Open University (UK) 22 028 17 860 23% Athabasca University (Canada) 34 338 28 635 20% Golden Gold University (US)* 37 440 37 440 0% Developing Countries Virtual Monterrey (Mexico) 3950 3950 0% UNITAR (Malaysia) 15 000 15 000 0%

Source: www.open.ac.uk, www.athabascau.ca, www.ggu.edu, www.ruv.itesm.mx, www.unitary.edu.my. Official prices as shown in April 2004. *International students are not eligible for US grants and pay $90 for visa administration. tion, by investing themselves and/or encouraging Additionally, the efficiency of online education the private sector to invest. needs to be measured against educational objectives and context. It is clear that what is efficient The third major criterion is the economic sustain- in a developed economy, with an already estab- ability of any online education programme. Gov- lished ICT coverage, may not be so efficient for a low-income economy where the number of peo- ernments of developed countries and international ple with access to the Internet is much smaller. organizations, including the World Bank and the United Nations, have been actively involved in promoting new online higher education initia- To summarize: traditionally, the financial analysis tives. The question arises as to what will happen at of higher education has focused on two areas – the end of the programme when the specific funds firstly, comparing the cost of producing a course earmarked for online education have been used or educating a student, and secondly on analysing and the programme is handed to the local institu- individual initiatives and their profitability. Both tion, and/or when the funding priorities and pri- areas of analysis cast doubts on the profitability of vate investment interest shift to other areas. online learning, and although there are potential earnings with economies of scale and individual financial success stories, there have already been ICTs increase specialization, which in turn can many failures and there may be more when bring more efficiency to the educational sector donors withdraw their funds. Analysis of the by enhancing internal organization, communica- three other criteria – affordability, sustainability tion and knowledge sharing, and by allowing and efficiency – are also necessary in order to eval- teachers to specialize in their field of expertise. uate the economic viability of online higher edu- As described in the next section, the Internet is cation, and in particular to enable national Gov- providing new business models that promote ernments to take sound decisions. open access to education and research information. 6. Technological infrastructure and The Internet is also allowing the unbundling of applications academic functions and thus specialization, as well as promoting the convergence of different educa- Technology is not neutral, neither economically tional sectors, by facilitating the reuse of educa- nor pedagogically. From an economics perspec- tional content. This can yield new efficiencies and tive, the use (or lack of use) of different technolo- markets, and allow for local customization. How- gies has a variable impact on access, cost, effi- ever, unbundling can also bring with it possible ciency and ownership. What follows is a brief loss of ownership of educational resources and presentation of different online education technol- processes. ogies and their markets, as well as an analysis of

E-COMMERCE AND DEVELOPMENT REPORT 2004 114 CHAPTER 4: ONLINE HIGHER EDUCATION: ISSUES FOR DEVELOPING COUNTRIES their impact. The description given recognizes develop e-learning depends on the existence of a infrastructural issues and focuses on the most strong ICT infrastructure. For example, the Sur- recent debates on ICT applications for online edu- vey of e-Learning Readiness prepared by the Econ- cation. omist Intelligence Unit’s (EIU), when compared with the EIU’s broader e-Readiness Survey, shows ICT infrastructure a strong correlation between e-learning readiness and general ICT readiness (see chart 4.4). The use and the adoption of online higher education require ICT infrastructure. To maximize the However, as the outliers in the EIU’s survey illus- use of ICTs in education computers and software trates, connectivity is just one part of the picture. are indispensable, and in the particular case of The building of knowledge economies and of the online learning access to the Internet is also a pre- related human-resource capacity also requires the requisite. Reliable and fast connectivity, as well as availability of non-electronic information and sufficient bandwidth, are of particular importance knowledge sources (e.g. libraries, books and jour- in order to make full use of the range of e-learning nals available to the public), competent educa- software and applications – from animated simula- tional management, a culture of change and suffi- tions used to enhance learning in engineering or cient educational funds. A corollary then is that if medicine to video conferencing for increased online education is to be successful, funding of interactivity between students and teachers at a ICT infrastructure should not be at the expense of distance. The ability of a region, State or nation to other knowledge resources.

Chart 4.4 E-learning readiness and e-readiness

* UNCTAD based on EIU (2003a) and EIU (2003b).

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 4: ONLINE HIGHER EDUCATION: ISSUES FOR DEVELOPING COUNTRIES 115

For stakeholders producing or providing educa- or re-engineered to suit the purposes of multiple tion in developing nations the question is how institutions, faculty members or instructional best to maximize the potential of online education developers (Commonwealth of Learning, 2003). and the technological infrastructure available to These courseware systems are at the core of achieve their objectives. Some providers or Gov- online education. Producing such systems is ernments believe that the only way forward is to expensive, but their value is maximized if they increase connectivity or improve access to new are designed to be flexible, customizable, inter- technology. However, others, particularly local operable, easy to update and reused. Online edu- developers and providers, defend the use of low or cation should be more than simply the posting intermediate technology or concentrating access of educational information online. It is the pro- provision in community or distance learning cen- vision via the Internet of fully realized courses, tres, such as the ones used by Indira Gandhi Open with curriculum, bibliography, pedagogical University. sequence and so on.

ICT applications: Content production, delivery The large majority of online courses are developed and course management in the fields of business management and ICT- related areas. These are popular areas in traditional The Internet has had a major impact on education higher education, but additionally, they have in terms of both content creation and distribution. proved good for online learning because they can Digital technology has facilitated the creation and be standardized and generally require less face-to- distribution of content, but the Internet is also face interaction or practice outside the computer. allowing wider access to these tools so as to create However, other subjects such as education and and share knowledge through global resource primary health care studies, which would exchange and instant/distant content discussion. normally require a strong face-to-face/practical What follows is an examination of the structures experience, are also popular online courses. and products that support online content creation, Suppliers of online education primarily focus on delivery and management. courses that can be easily produced and reproduced, but also on where there is a large Designers and teachers use a wide variety of tools demand. Internet delivery is particularly popular to create content, such as word processors, presen- with postgraduate courses, presumably because of tation software, audio, video and animation. They their shorter duration and greater independence, also use ICT tools to evaluate students (e.g. assess- as well as their popularity with full-time ment tools). Moreover, they use ICT-based com- professionals. A survey of online education and munication to enhance teacher–student or stu- services in Australia (Bell et al., 2002) shows that dent–student interaction. Traditional methods, the courses most repeated are those leading to e- such as audiocassettes and videocassettes, are and commerce and online education diplomas – that will continue to be widely used in developing is, the object, as well as the means of study, is the countries, for example by the Indira Gandhi Uni- Internet – and that 90 percent of the online versity in India, and even in online courses pro- courses at universities are at postgraduate level. vided by Western institutions (e.g. the UK Open But as we have seen with the different models of University). To state the obvious: the creation and online higher education, other business models are delivery of content requires course management, used in distributing online specialized content and vice versa, and both are reliant on the infra- since this specialization is the core and strength of structure available. For example, distributing con- the providing institution. One such example tent through videoconference will only be possi- would be the Master’s programme in Leadership ble if the intended audience has access to for Sustainable Development delivered by LEAD videoconferencing equipment as well as the (an international network of individuals and knowledge and motivation to use it. organizations committed to sustainable development, focused on development activities), and Educational materials for online education are accredited by Middlesex University in the United normally referred to as courseware, and learn- Kingdom. The programme, funded by private ing objects are the modular units of instruction donors, supports a limited number of inter- that can be stored and searched through data- national students to become leaders and maintains bases and networks, used and reused, aggregated a network for sustainable development.

E-COMMERCE AND DEVELOPMENT REPORT 2004 116 CHAPTER 4: ONLINE HIGHER EDUCATION: ISSUES FOR DEVELOPING COUNTRIES

Box 4.5 Examples of projects for open academic and scientific journals

The Public Library of Science was founded by Nobel Prize winner Dr. Harold Varmus and fellow researchers Patrick Brown and Michael Eisen; the Free Online Scholarship (FOS) movement; the creation of the widely read (for profit) BioMed Central to provide “immediate free access to peer-reviewed biomedical research”; the Budapest Open Access Initiative (which has been endorsed by 210 organizations), and similar projects seek to promote new business models for publishing that allow academic and scientific information to be more widely available to the research community. Other efforts to provide reduced price or free access to researchers in developing countries include the Health InterNetwork, which was introduced at the UN Millennium Summit in the year 2000; a number of projects sponsored by the International Network for the Availability of Sci- entific Publications; eIFL.Net (Electronic Information for Libraries), a foundation that “strives to lead, negotiate, support and advocate for the wide availability of electronic resources by library users in transition and developing countries”; and a new effort by the Creative Commons to create a licence for free access to copyrighted materials in developing countries. Source: South Centre (2003).

Open content ing information but also making accessible information from their own countries and communities. Currently, there are informal knowledge- The growth of the Internet has led to increased sharing initiatives targeting the needs of develop- availability of content and, as with public librar- ing nations, such as the international Open ies, there is a demand for knowledge to be shared Knowledge Network consortium, but not at the and freely or cheaply accessible. A well-known specific level of higher education. initiative to make courses publicly available online is Open Courseware. A renowned example is the Professionals from developed and developing Massachussetts Institute of Technology (MIT) countries have suggested (UNESCO, 2002) that OpenCourseWare (OCW) initiative, which makes open courseware, should: selected MIT courses online available for free (thanks to a $11 million donation from the Wil- 1. Provide educational resources for college and liam and Flora Hewlett Foundation and the university faculties to adapt them in accord- Andrew W. Mellon Foundation.21 The MIT initi- ance with their curricular and pedagogical ative does not result in the full course being availa- needs; ble on line or in any user of the OCW gaining an MIT degree. Posting information online is not the 2. Include the technology to support open, same as providing an online course. In some cases, meaningful access and use of courseware; all that is posted on the OCW site is the syllabus and bibliography. Whether because of intellectual 3. Include at a minimum the course description, property rights restrictions (see next section on syllabus, calendar and at least one of the fol- legal issues) or management motivations, OCW lowing: lecture notes, demonstrations, simula- does not offer access to lectures, explanations and tions, illustrations or learning objects. discussions or to the key readings For most users the OCW initiative is not sufficient, particularly Research and publication for those in developing countries where access to reading material is limited. An additional obstacle The Internet is also having a major impact on is that all information is in English and OCW’s research and publication. It has led to information plans are that it will continue this way being available to more people, new publication (UNESCO, 2002). Higher education institutions opportunities, networking being enhanced from developing countries are greatly interested in through newsgroups and other mechanisms for pursuing an open courseware initiative, but not at collaborating across borders. For most scholars in any price. They have cultural and language con- developed countries it is almost unimaginable to cerns as well as the more general infrastructure engage in research without access to the Internet. concern, and they recognize current intellectual The Web has produced a huge increase in “grey lit- property rights barriers. The interest lies in access- erature” – online publication of research outside

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 4: ONLINE HIGHER EDUCATION: ISSUES FOR DEVELOPING COUNTRIES 117 the traditional mechanisms of academic publish- registration and administration procedures. They ing. The opening up of knowledge through online enable an institution to develop electronic learn- databases and journals has had a transforming ing materials, to offer these courses electronically, effect. However, access to a large number of estab- and then to use the same system to test and evalu- lished refereed journals and databases is still con- ate the students and to generate student databases trolled through subscription, and the ownership in which individual results and progress can be of the intellectual property contained in journals charted (Paulsen, 2003). is tightly controlled by publishers.22 Universities use commercial and in-house learning Secondly, the Internet is challenging and trans- management systems to manage their online pro- forming academic research and publishing by grammes. The market for LMS is estimated at establishing new models of peer review and pub- around $500 million (see table 4.5). There are two lishing which will influence the balance of power major international players: WebCT (United as regards who owns intellectual assets (see box 4.5 States), a privately held company, created in 1995 for some examples). This shift has the potential to with $125 million secured through six rounds of democratize not just access to knowledge but also equity financing, which has a 33.5 per cent market ownership and control over how that knowledge share in the United States; and Blackboard is used, with clear benefits and advantages for (United States), which had a total revenue of $92.5 institutions in developing countries. million in 2003, has 5.3 million active users at more than 1,600 institutions in more than 70 Additionally, the separation between production countries and has a 42.5 per cent market share in and distribution, as in traditional higher educa- the United States, covering all educational sectors tion, is blurred. In some cases online content is (Hawkins et al., 2003). developed by the provider, the teacher himself/ herself or the university (e.g. LEAD develops its The LMS market is still at an early stage of devel- own high-quality content), while at other times opment. With over 140 commercial offerings external content is used, adapted or not (e.g. the worldwide the market is highly competitive with Arab Open University adapts materials from the few leaders, mainly based in the United States, but UK Open University). with low market share. For example, Bersin26 maintains that the market share of the largest Content management player is no more than 7 per cent of the market. A European study found as many as 52 different Content is provided primarily through Learning commercial and 35 self-developed LMS in 113 edu- Management Systems (LMS). The newer and more cational institutions. Moreover, institutions do advanced version (Learning Content Management not seem to be especially loyal to a particular Systems) offers additional features that focus on brand, switching between different packages or content management and authoring. LMS inte- using several systems in one university. For exam- grate the management of content – online ple, a survey of Australian universities found that modules and communication tools – with student out of 40 respondents, 29 used WebCT, 20 had their own in-house system and 17 were using Blackboard. Table 4.5 Learning management systems market The LMS market will be expanding (with new and (millions of dollars) updated products, and a diversified language offer) and is expected to undergo some consolidation through the merger of providers. The provision of ESTIMATIONS BY: 2001 2003 2004 2006 more languages and features, together with IDC $ 800 $3'600 increased standardization or open source systems Simba Information $ 200 development, will reduce institutions’ incentive to Lifelong Learning Report $ 529 develop their own software. However, economic rationale does not always play a part in opting for Bersin & Associates $ 350 the in-house development of a system; rather, Source: hr. com (2004)23, HighBeam Research (2004)24,Bersin decisions are often driven by the bargaining power 25 (2004) and interests of ICT departments. Evidence from a

E-COMMERCE AND DEVELOPMENT REPORT 2004 118 CHAPTER 4: ONLINE HIGHER EDUCATION: ISSUES FOR DEVELOPING COUNTRIES study of LMS systems in European institutions different IT platforms and tools. Finally, the edu- (Paulsen, 2003) suggests that IT sections of univer- cation software sector is still in its infancy and nei- sities and other institutions attach great impor- ther the commercial nor the FOSS market has a tance to developing their own platform and not monopoly; consequently, early developers have buying programmes developed by others. For the opportunity to find a niche. example, in the United States only 7.2 per cent of institutions have developed their own LMS One FOSS example28 is the Open Knowledge Ini- (Hawkins et al., 2003), whereas in Europe 35 out tiative (OKI) course-management system. This of 113 (32 per cent) have developed their own sys- developed from collaboration among top US and tem. Universities have developed and/or acquired UK universities. Led in the United States by their own LMS, benefiting from available free and MIT, and supported by a philanthropic donation, open source systems or from partnerships with the OKI is a scalable and sustainable reference other institutions (e.g. the UK Open University platform designed for Internet-enabled educa- and the Arab Open University). tion, which specifically addresses the needs of higher education. As its web page notes, where Open applications possible it uses open standards and its code is available to everybody, including commercial ICTs have allowed the production and distribu- vendors. tion of content in a variety of electronic formats incorporating different media. The ability to use A study (Harris and Yanosky, 2004) of 117 institu- content on different platforms is an asset, particu- tions involved in e-learning (87 in the United larly in education, where the potential for content States and 30 elsewhere) showed that when institu- exchange is unlimited. Currently, there are two tions bought new e-learning products, in 16 per complementary approaches to ensure interopera- cent of cases they would choose free and open bility and transferability: free and open source source, while 80 per cent would choose commer- software, and open standards. Although their cial products, and only 4 per cent would choose approaches differ, international initiatives such as in-house development. SCORM and the OKI (explained below) are playing a central role in promoting openness and reus- The second approach to ensure interoperability is ability of content. the commitment to and use of open standards both by commercial and by open-source packages. Free and open-source software (FOSS) is soft- Open standards are transparent descriptions of ware that has made its source code public, and data and behaviour that form the basis of interop- allows users to modify the programme and thus erability. They are crucial for maximizing the use customize and adapt it to particular needs.27 and reuse of different media and content, and they guarantee interoperability, which open source FOSS, already widely used for web server technol- software per se does not. However, in practice, ogy, has a more limited presence in desktop soft- developers and providers show different levels of 29 ware. However, in the field of education, it has commitment to open standards. Because they the potential to become widely used in manage- wish to protect their product or to reduce soft- ment systems and on desktops. Firstly, universi- ware development time, standardization is not ties are at the centre of open software develop- always regarded as suitable. ment that is, there is a strong connection between users and developers, which facilitates the continu- An example of an open standard that has ous updating and support that ICT software achieved some success in corporate learning pro- requires. The list of current open source course grammes in the United States is the Sharable management software (see annex II) shows how Courseware Object Reference Model (SCORM) most software is developed in or with the support initiative. This initiative, which began in 1997, is of a university. Secondly, the positive externalities part of a wider US government programme for of education provide a strong incentive for sharing distributing learning. Its aim is to foster the crea- and maximizing the use of existing technology tion of reusable learning content. The initiative and content. Thirdly, FOSS, at least until there is has identified critical technical interface points a full commitment to interoperability, can pro- around which standards for web-based learning vide the necessary communication links between technologies might be developed. The first ver-

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 4: ONLINE HIGHER EDUCATION: ISSUES FOR DEVELOPING COUNTRIES 119 sion was released on 31 January, 2000, and since Accreditation and recognition then 64 LMS have adopted SCORM standards (www.adlnet.org). Accreditation is the currency of higher education. While learning for its own sake has cultural value It should be noted that the ability to use content and in some circumstances can be viewed as a lei- on different platforms and to connect different sure activity, in economic terms it is accredited and systems provides further efficiencies. In terms of certified qualifications that count. Through appro- ICT efficiency the optimum choice to promote priate quality assurance approaches and accredita- interoperability is a combination of open source tion systems, Governments and accredited institu- and open systems. Some institutions have already tions ensure and promote quality in higher paid a high price in entering into contracts with education, support the transferability of degrees fixed technology systems, and those that have to across states, regions or nations and guarantee the take decisions in the future will benefit from ana- authenticity of a degree. lysing the potential costs of all the options available. National quality assurance and accreditation systems vary from one country to another and in many developing countries are non-existent. The 7. The legal framework lack of trust in a national accreditation system seriously undermines its educational credibility As we have seen, access to, and cost, ownership both nationally and internationally. Each govern- and efficiency of, online education are condi- ment has its own policies to provide accreditation; tioned by technology, but also by the broader pol- for example, in the United States accreditation is icy context and particularly the existing legal provided through independent not-for-profit framework and the general level of ICT skills. The organizations, and the only role of the US Depart- legal framework affecting online higher education ment of Education is to oversee such accreditation extends from specific regulations in the field of institutions, not the actual educational institutions education (recognition of titles, accreditation of themselves. This high degree of institutional educational institutions, curriculum design, teach- autonomy contrasts with European education sys- ers’ qualifications etc.) to broader legal issues, tems (such as those in Germany and France), including intellectual property rights, commercial where autonomy to borrow money, to invest in law, security and authentication, electronic pay- new products and, therefore, to market degrees ment systems, consumer protection, applicable online and internationally is more limited. law, and fiscal and customs regulations. Both sets of regulations shape the ability to buy, sell, As regards accreditation, online higher education develop and use online higher education. For is an issue in the key areas of quality, transferabil- example, in order to sell a degree online an institu- ity, authenticity and branding. The growth of tion needs to be accredited and, the degree needs harder-to-regulate online higher education, as well to be recognized; students want to be protected as the increase in the number of higher education against provision default and unauthorized use of students, and the internationalization and privati- their personal data, course developers want to zation of education, provides challenges for control the use of their work and Governments national accreditation systems. Online education want to control the quality of online educational increases the number of programmes and individ- programmes. ual modules, as well as the number of institutions offering educational services. This creates prob- Of the various legal issues30 affecting online lems of evaluation, inspection and examination, higher education, this chapter highlights two of and educational services providers may find it eas- particular relevance for developing countries: ier to circumvent local regulation by going online. accreditation and recognition, and intellectual property rights (IPRs). These issues are of special Quality assurance and accreditation systems tend interest to developing countries since these are the to be weak in most developing countries, particu- countries that suffer most from lack of access to, larly in Africa and the Arab regions. However, in and recognition of, their knowledge resources, the light of increasing demand for and supply of and are the net importers of online higher higher education, accreditation systems are being education. revised in those regions. Countries such as Malay-

E-COMMERCE AND DEVELOPMENT REPORT 2004 120 CHAPTER 4: ONLINE HIGHER EDUCATION: ISSUES FOR DEVELOPING COUNTRIES sia and South Africa are already working on regional leaders (i.e. the African Virtual Univer- updating their quality assurance and accreditation sity). Developing countries in particular suffer systems. For example, South Africa established a from poor recognition of their degrees, and the Higher Education Quality Committee in May arrival of online education is a further threat. 2001 to tackle the large number of private institu- Before the advent of the Internet, poor institutions offering higher education programmes ille- tions sought partnerships with counterparts in gally (OECD–CERI 2003). richer countries that could provide them with the established brand recognition. With online Despite the current initiatives to update national courses, students who have the requisite resources accreditation systems, they tend to ignore the spe- can increasingly study in prestigious universities cific features of online education, leaving this while staying at home and opt for the more inter- mode of delivery in a limbo (at best). But there are nationally valuable foreign degrees. some innovative examples: in India the National Assessment and Accreditation Council has now In summary, it is likely that in online higher edu- been asked to prepare for the responsibility of cation both branding and accreditation will play accrediting the international educational offerings an important role in shaping the market. But they in all forms, including electronically (OECD– must not be confused: branding provides the mar- CERI 2003). keting value, while accreditation makes a course valid. The existence of national systems of accreditation means that institutions recognized in one country Additionally, there is the question of the validity are not automatically recognized in another. For of an online course if the institution cannot be example, the UK Open University has failed to sure who actually took an online examination. gain accreditation in the United States. Online For example, the Arab Open University insists on higher education circumvents this obstacle: it a physical written examination as a part of its allows institutions recognized in one country to assessment process so as to compare to and vali- provide online education in another country with- date online assessment.31 In consequence, ensuring out needing a specific accreditation since the quali- authenticity for e-learning courses may imply fication on offer will be accredited in the export- added costs, such as the establishment of centres ing country. In online education what counts is for examination purposes, which may have an the ability for a nation and/or institution to impact on financial sustainability. The UK Open develop a reputable and desirable brand for its University supports this extra cost by charging a online courses. fee to students who want to be examined outside centres already established. The submission of However, in some cases accreditation systems written assignments, as in offline education, also aiming to ensure quality make requirements that creates concerns over the authenticity of students’ can hamper the flexibility of online higher educa- work. The Internet has amplified the options for tion internationally. Examples include making it plagiarism or even “pay & get your essay” serv- compulsory to have a national licence to work ices. For example, www.ivyessays.com offers (for example, as a lawyer) or for students to engage essay services from $12.99 per page, or for $14.95 in some element of face-to-face contact so as to one can have a monthly subscription to minimize the risk of cheating, or even requiring www.digitaltermpapers.com and have access to its the same curriculum as the home-campus version. database of essays. Institutions are exploring a All these are part of the Malaysian quality assur- combination of physical presence, technical tools ance framework. and pedagogical measures to overcome authenticity issues. Renowned university brands sell well offline and provide a valuable asset for their online endeav- Currently, there is no single international accredi- ours. Additionally, other universities have success- tation body for either online or offline higher edu- fully built their brand and recognition solely cation. Education has traditionally been in the online (i.e. the University of Phoenix). Students national domain, and thus most regulations are at look for recognition, either through brand value the national level. In order to be meaningful, glo- or accreditation of their studies by developed bal education requires transparent and recogniza- country institutions or developing country ble standards of accreditation, but the debated

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 4: ONLINE HIGHER EDUCATION: ISSUES FOR DEVELOPING COUNTRIES 121 search for an international accreditation system is ships and marketing. This model has enabled the in itself being questioned. Organizations from Academy to operate in 33 of the world’s least developed countries reject the idea of developing developed countries. an international accreditation system on quality grounds. And organizations in developing coun- Intellectual property rights tries dislike supranational regulations that could limit a country’s cultural identity and might fail to take into account the different levels of develop- IPRs play a role in determining the ability to ment. access, produce, copy and distribute content and specific expressions of knowledge. Having access International measures to assure students of the to knowledge does not prevent others from bene- value and transferability of their studies have fiting from such knowledge. However, economic developed primarily in a second area – one that is policy has long supported the need to grant tem- complementary to accreditation, namely recogni- porary property rights to innovators so as to ena- tion. Most of the initiatives to recognize titles ble a return on their investments and thus encour- granted by educational institutions in other coun- age them to continue innovating, thereby tries are at a regional level. The principal ones are contributing to a society in general. On the other the regional conventions (Africa, Arab region, hand, IPRs also act as a deterrent to innovation by Asia and Pacific, Europe, Latin America and the limiting free access to knowledge and information. Caribbean, and the Mediterranean region) on the The effects are notably greater for developing recognition of qualifications. While the European countries that lack resources to pay for access, and region is renowned for its efforts (as part of its that are net importers of such goods and services. deeper integration) to recognize different national qualifications at a regional level (known as the Since education is a (contested) public good,32 and European Bologna process), other regions have is strongly based on knowledge, the application of not been so successful in achieving such results IPRs to education is of particular importance. The (UNESCO, 2001). arrival of the Internet has aggravated the conflict in several ways. The Internet is promoting more In certain professions, such as teaching, medicine, knowledge exchange around the world – from law and architecture, professional certification is developed to developing countries, and vice versa. essential in order to be able to work. This certifi- Since online education services derive from cation is greatly restricted on a geographical basis. diverse sources (music, software, content, design, For example, obtaining a degree in medicine in media, etc.) they are also restricted by varied pro- Spain does not allow the holder of that degree to tecting rights, which are now enforced by both work in the United States. Moreover, professional technical and legal methods. Moreover, free public certifications usually have a strong face-to-face and access to knowledge (e.g. through libraries) is not practice component: for example, no one would guaranteed through the Internet. want to be operated on by a surgeon with a purely online degree. Thus, it is not surprising for courses leading to the professional qualifications There are a few initiatives taking place in different just mentioned to have a limited presence in the spheres to ensure that the public enjoys further online sector. access to knowledge. Leading examples are the previously mentioned open source software, con- In specific cases, online courses can lead to indus- tent and standards initiatives. As these initiatives try-standard certifications, which are very valua- become more widely known to both the public ble in themselves. The Cisco Networking Acad- and content and software creators they should be emy is a successful example. Launched in 1997, it able to expect stronger support. The more impor- has provided basic Internet technology skills to tant policy question is whether policy makers and nearly 300,000 students through over 10,000 acad- institutional managers in local, national and inter- emies, preparing them for industry-wide certifi- national arenas will be able to recognize and pro- cates. The reasons for its success are clear: it has mote the benefits of open knowledge sharing and access to a large amount of funding, has a stand- to establish adequate legal frameworks and prac- ardized curriculum, and benefits from an excellent tices for ensuring this sharing, in particular for network infrastructure, as well as strong partner- developing countries.

E-COMMERCE AND DEVELOPMENT REPORT 2004 122 CHAPTER 4: ONLINE HIGHER EDUCATION: ISSUES FOR DEVELOPING COUNTRIES

D. Conclusion: The Internet’s true, there are some examples of innovative and impact on, and implications for, appropriate methods of using technology. Simi- higher education larly, there are open approaches (open software, open standards, open content and diversity) that can promote wider access to technology and con- In a world where access to, and use and creation tent. Moreover, ICT capacity will continue to of, knowledge is central to social and economic increase in developing countries, making the development, higher education is in increasing expansion of online education possible. demand. Online higher education is in some cases providing further educational options for stu- The economic drivers to invest in higher educa- dents, promoting the sharing of information and tion consist of more than simply the desire to knowledge worldwide, reinforcing ICT use and directly reduce the costs of education. The access, and supplementing traditional modes of assumption that online education is cheaper than supply of education. traditional education is questionable as cost-savings examples have not been properly verified. In Data measuring the size and shape of the online each case, a review of the cost of online higher higher education market in developing countries education in terms of affordability, profitability, are limited. Nevertheless, estimates speak of a efficiency and sustainability is necessary for under- small volume of online-only higher education standing and evaluating the rationale and implica- courses in developing countries, with higher con- tions of investing in online higher education. centrations in more developed nations and among elite populations, particularly catering for the “earner-learner” – that is, professional, postgradu- The Internet is in some cases shifting the cost of ate – student population, and in high-demand sub- online higher education from the Government jects. For the time being online higher education onto other providers (public–private partner- is a niche market, particularly in developing coun- ships), from the institution to the students (in the tries. form of increased fees), from national to international providers (through sponsorships and part- Current initiatives in the use of ICTs in education nership agreements) and from national to interna- in developing countries are concentrated on the tional students (by charging differential fees to progressive use of ICTs in education (CD ROMs, non-domestic students). Thus, online higher educa- e-mail communications, basic acquisition of ICT tion is being financed by a number of stakeholders skills etc.) rather than on purely online higher with different interests, and although there is a education. Face-to-face delivery and traditional momentum to invest in ICTs for online education, distance education continue to provide the bulk of private investors are not always governed by edu- education. The opportunities to develop online cational priorities nor by the imperative to bridge higher education include an expanding higher edu- the digital divide or to promote local content. cation population, a strong interest in developing ICT-based skills and education, and an interest in financing ICTs. Further opportunities are also ICTs increase specialization, which in turn can available, in some cases because of the existing bring more efficiency to the educational sector by educational infrastructure, and the prospects and enhancing internal organization, communication resources offered by other forerunners. On the and knowledge sharing, and by allowing teachers other hand, institutions face a series of constraints to specialize in their field of expertise. Addition- in developing online higher education. As the ally, the Internet is encouraging new thinking UNCTAD survey has shown, these include the about the validity of current business models for lack of access to ICT infrastructure, the high cost the provision of education and access to research. of ICTs, the lack of ICT skills, international com- The Internet has impacted on thinking about the petition and student preference for face-to-face purpose and profitability of academic research and teaching. publishing, as well as having forced consideration of the value of open systems in technology, thus The lack of access to ICT infrastructure and appli- prompting similar debates in higher education cations is often highlighted as being of particular about the use of open content and open importance to developing countries. While this is technology.

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 4: ONLINE HIGHER EDUCATION: ISSUES FOR DEVELOPING COUNTRIES 123

The Internet has expanded the diffusion of knowl- One important role of Governments is to ensure edge but it has also altered the terms of ownership that the current widespread enthusiasm for online of knowledge, with pulls in different directions. education33 does not overshadow the wider objec- On the one hand, it has increased access to knowl- tives that they set for initiatives such as reaching edge by making accessible research, publications students who are under-represented (owing to dis- and networking opportunities. On the other hand, ability or geography, or for some other reason), the desire to control intellectual property leads to providing local knowledge, and reducing the dig- increased privatization of knowledge. Further clar- ital divide. Governments have the opportunity to ification regarding the application of regulatory pursue policies that redress existing online higher issues to online education, including intellectual education deficiencies and that maximize educa- property rights, is necessary in order to allow tional and developmental outcomes. Some of the transparency and confidence. Proven initiatives options available to Governments to ensure that such as FOSS, open standards or open content ben- online higher education has a positive impact on efit common ownership and use of information. reducing the digital and educational gap are set out below. The Internet has further internationalized (the trade in) education, and is increasing access to • Creating awareness and encouraging collab- international higher education services, both oration and dialogue between educational online and offline. These effects contrast with the professionals, the IT sector and other stake- fact that developing countries tend to be at a disad- holders (such as students). There are multi- vantage in the international education arena, ple stakeholders with different interests in where institutions in developed countries attract online higher education. A better under- most international students, and degrees from standing of each other’s interests, aims and developing countries are far from being fully rec- strengths facilitates the promotion, design ognized in developed nations. The Internet is pro- and implementation of online educational moting competition for international students and initiatives. thus it increases pressure on developing countries’ institutions. Additionally, online higher education • Fostering a culture of learning, through requires further strengthening of quality assurance investing in traditional resources (books, and recognition processes. teachers) and technologies. Funding online infrastructure and applications should not Recommendations be at the expense of traditional knowledge resources, and local content and existing expertise are a valuable resource to be sup- On the basis of the above analysis a number of ported and promoted. suggestions are provided below for Governments and educational institutions in developing • Promoting coherence between educational countries. and ICT strategies. The use of the Internet in education has the potential to, among Despite the growing competition that developing other things, provide wider access to knowl- country institutions face in the provision of higher edge, promote ICT skills and enhance edu- education from developed countries, they still have cational networks as well as international a broad range of strategies that they can use to presence. However, ICTs are only tools to attract students. Firstly, they can differentiate their achieve educational objectives. Relevant courses through local content/language. Secondly, ministries within Governments need to con- they can gain recognition of their institutions and sider broader educational strategies when courses by attaining international accreditation thinking about e-learning so that e-learning either on their own terms or through association strategies meet current and future national with a developed country or regional institution. educational priorities. There should also be Thirdly, they can maximize the advantages of geo- coherence with the general e-strategy, so graphical presence in a market. Finally, they can that measures to solve common concerns pursue a strategy of developing regional leadership, regarding infrastructure, skills and the use although this is clearly not a strategy that all insti- of open systems are consistently reflected in tutions can succeed in pursuing. both sets of strategies.

E-COMMERCE AND DEVELOPMENT REPORT 2004 124 CHAPTER 4: ONLINE HIGHER EDUCATION: ISSUES FOR DEVELOPING COUNTRIES

• Supporting the use of open technology and education and that they allow the achieve- open content in higher education. The use ment of particular educational goals. of free and open source software encourages the deepening of ICT skills and allows for • Monitoring and measuring the economic, local customization, and as with open stand- educational and social benefits and/or costs ards, it promotes the interoperability of dif- of e-learning in general, and online higher ferent e-learning tools. Open content is a education in particular, as well as carrying valuable option for developing countries, independent and rigorous research into the both to access foreign content and to further uses of online learning, so as to be able to disseminate local content. Governments benchmark and evaluate the efficiency of e- play a role in promoting open initiatives, in learning initiatives and return on invest- particular in the field of higher education, ment. by promoting their use in universities. In the light of the assessment made in this chapter of the experience acquired so far, it is not possible • Providing incentives for investing in e-learn- to give a categorical answer to the question of ing and online higher education so that edu- whether online higher education is a sound propo- cational goals are maximized – for example, sition for developing countries. Governments’ regulating the provision of online higher best option is to analyse the benefits of online education, and promoting long-term sus- higher education from the overall development tainable partnerships between different perspective, including national educational objec- actors (e.g. a software company and a uni- tives, and the competitiveness and quality of the versity) that set minimum quality and reach online education on offer, with a full analysis of requirements. The aim should be to enable the financial restraints and the opportunities an educational environment that provides offered by partnerships and open source-software/ equitable access to education and that is content approaches. aware of the limits of a competitive environment. In conclusion, online higher education can fulfil some of the promises made on its behalf to the • Developing transparent quality assurance, extent that the educational and policy environ- accreditation and recognition measures both ment enables the expansion of higher education to nationally and globally, through consulta- previously excluded students, encourages relevant tion with key stakeholders, ongoing evalua- and appropriate learning content and processes, tion and consensus, so as to ensure that they promotes innovation and investment in educa- cover the specific nature of online higher tion, and recognizes students’ needs and efforts.

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 4: ONLINE HIGHER EDUCATION: ISSUES FOR DEVELOPING COUNTRIES 125

Annex I MODELS OF ONLINE HIGHER EDUCATION

UNCTAD conducted an in-depth survey on e-learning in selected higher education institutions. The findings of the survey, which have been complemented with parallel research, are summarized in five broad models as follows: Model 1: Traditional university going online Model 2: Open university going online Model 3: Independent online courses (from non-traditional capacity-building institutions) Model 4: Consortiums of institutions providing access to online learning Model 5: Start up institutions using e-learning

MODEL 1: Traditional university going online Examples: Monterrey Virtual University Mauritius University National University of Lesotho www.ruv.itesm.mx/ www.uom.ac.mu www.nul.ls Budget/ finance: $700 million per annum $2.5 million No data available Online cost: $30 million More expensive than offline (for Not providing online courses at the Cheaper than offline business and IT courses) moment Cost structure (e-learning) Regular budget. Primarily funded Regular budget: student fees ($2 Not applicable through students’ fees. million) and government funding ($0.5 million) Reach: 12,190 online students (5,586 National National Master & 6,604 undergraduate) Total number students: 93,797 National & international students. 16 programmes and 216 courses Content: Creates own content Creates own content, and buys Not applicable pre-existing content from India, South Africa, UK and USA. Accreditation: Yes, Monterrey University Own Own IT strength: Robust, IT University, mixed tools Creates its own content Commitment to investing in ICT and exploring the possibilities of e- learning Bargaining power: University of Monterrey (institution) Negligible Poor Partnerships: With graduate programmes, No formal partnerships but None as yet, although the continuous education providers, receives donations of free software university receives funding from social programmes. from Microsoft; buys content from private sponsors and charities India, South Africa, UK and USA Demand: Spanish-speaking students in Latin National National America and United States. Strengths/ Opportunities: Name recognition, accreditation, Creates own content, commitment Commitment to expanding access regional leadership, cost-effective to using ICTs, expanding provision. to education and to innovation Weaknesses/threats: Tutoring. Students’ preference for Transition to new culture, lack of Lack of financial resources, lack of face-to-face learning. access to ICTs, lack of funding qualified staff, absence of national ICT policy framework to support e- learning. Weak higher education Trading opportunities: International Plans to deliver one IT course None internationally through a partner institution

E-COMMERCE AND DEVELOPMENT REPORT 2004 126 CHAPTER 4: ONLINE HIGHER EDUCATION: ISSUES FOR DEVELOPING COUNTRIES

MODEL 2: Open and/or distance university going online Examples: Indira Gandhi Open University UK Open University www.ignou.ac.in www.open.ac.uk Budget/ finance: $14 million $400 million Online cost: $0.2 million 30 million spent on e-learning Cost structure (e-learning): Student fees, government funding. Combination of student fees (international and home All funding has conditions attached except student fees. students) and government funding. Low fees. Also attracts significant research funding for e-learning and has partnerships with a number of organizations, including MIT and Research Machines (the UK’s leading educational technology company) Reach: 334,415 students (10,000 online students, 60% of them 160,000 students and their tutors are online (3/4 of total are employed) number of students) International part-time students Content: Own and pre-existing content. Wide variety of formats Creates its own online content as well as partnships in and sources. Publishing and design are the main cost creating broadcast material with the BBC. Online driver. content, largely lecturer- and department-driven Accreditation: Own degrees and diplomas recognized nationally. Own degrees, which it also offers internationally. Possible credit transfer to & from other universities. IT strength: Broadcasting (TV and radio). Progressively introducing Broadcasting – partnership with BBC, publishing. Centre online courses for innovation and R&D in e-learning within the university Bargaining power: Management and academic community. Government Size, expertise, tradition, resources (representation on management board) Partnerships: Doordashan India’s National Broadcaster; All India National Broadcaster (BBC). Radio; Government of India, Department of Electronics; Today it has partnerships and/or students in 31 EdExcel UK countries. Demand: High national demand. Over 11 million students National and international Strengths/ Large domestic market and demand. General strong institutional position. Institute of Opportunities: Distribution and support network. Increasing national Educational Technology engages on research on the economic investment in education use of e-learning. Weaknesses/threats: Availability of suitable software and hardware, low Increased global competition; Residual suspicion of the penetration of the Internet and low demand for online quality of “distance education”; inability to operate in the programmes. High cost of ICT. Poor primary education USA Trading opportunities: Delivery of services through other institutions in India Began offering degree courses overseas in 1982. 28,381 overseas students and 42,710 students in collaborative teaching programmes. Sources: OpenUniversity. Seee-learningand the Open University(2003). Available at http://www.open.ac.uk/elearning/index.shtml, as well asthefactsheet “TheOpenUniversity worldwide“, available at http://www.3.open.ac.uk/media/factsheets/Information%20about%20The%Open%20University/The%20Open%20University%20 Worldwide.pdf

MODEL 3: Independent online courses (from non-traditional capacity-building institutions) Examples: LEAD United Nations University www.lead.org www.unu.edu Budget/ finance: $5 million $30 million / year Online cost: Not applicable $50,000 per course. More expensive than offline, except ICT courses Cost structure: Non-regular Regular and non-regular, government, endowments, fees Reach: Limited. 100 national and international students have National & international, part-time students graduated. Content: Own high quality Own research Accreditation: Master in Professional Studies, accredited by Middlesex None; occasionally a course may count for an external University, UK degree IT strength: Limited, progressive Progressive Bargaining power: IT industry, publishers, institution management Primarily, IT industry and infrastructure providers (pricing policies present real obstacles). To a lesser extent, institutional management and publishers. Partnerships: Higher education institutions, learning network, UN, higher education institutions, businesses foundations, NGOs Demand: Part-time environment specialist students Support for traditional capacity development activities. Strengths/ Opportunities: Quality, specialized Well-known brand name. Specialist expertise Weaknesses/ threats: Funding, costs, human resources Staff resistance, lack of expertise and student support Trading opportunities: Provision of services None. Some envisaged in the future through partner. Quality measured: Questionnaire, external evaluator, students’ feedback Sources: LEAD. See LEAD International Masters Program. Available at www.lead.org

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 4: ONLINE HIGHER EDUCATION: ISSUES FOR DEVELOPING COUNTRIES 127

MODEL 4: Consortia of institutions providing access to online learning Examples: Finnish Virtual University (University of Jyväskylä) UK eUniversity www.virtuaaliyliopisto.fi www.ukeu.com Budget/ finance: $102 million $114 million from UK government funding, plus student fees. Online cost: Finnish Virtual University: $480,000 Variable from institution to institution Online costs as much as offline $37 million invested in the custom built learning platform from Sun Microsystems Cost structure The government finances almost the totality (95%) Joint venture between UK universities and the private (e-learning): sector with government funding plus student fees Reach: National and international International Content: Develops own content, and buys electronic publications Provided by partner universities and journals, mostly from US/ UK publishers. Accreditation: Yes, own university Yes, through each of the individual universities involved IT strength: Mixed tools. National prominent e-readiness Integrated, web-based learning management software Bargaining power: Management and teachers, followed by publishers UK university partners, UK government ministries (education and department for trade and industry) Partnerships: Finnish Virtual University is associated with Finnish Technology from Sun Microsystems universities to provide 450 courses. 20 UK universities providing course content (including University of Cambridge, University of Manchester, University of Leeds) International partners from 16 countries (including Beijing Foreign Studies University) International corporate and IT partners Demand: 5000 Finnish Students Low Strengths/ Opportunities: Individual courses, accreditation. Network of 16 UK universities’ brand name, high demand for English- disciplines. Government’s interest in investing in higher language higher education, government supported education. project, promotion by the Department of Trade and Industry Weaknesses/ threats: The engagement of departments and faculty. Competes Lack of demand for e-learning with other online courses offered internationally. Complicated governance, conflicting priorities between Conditioned by funding different stakeholders Trading opportunities: National / international International

Sources:Observer (2004), ObservatoryonBorderless Higher Education (as cited by Schmoller (2004), “UkeU extract from‘Update on the future of the UK eUniversity– finishedas an independent organisation, but dit it have to be this way?”. Available at www.schmoller.net/mailings/ukeu.html), UK Parliament (See UK Parliament, House of Commons Hansard, Written Answers for 22 March 2004. Available at www.parliament.the-stationery-office.co.uk).

MODEL 5: Start-up institutions using e-learning Examples: Arab Open University Virtual University of Pakistan www.arabou.org www.vu.edu.pk/ Budget/finance: $12 million Private university set up with $11 million for 4 years. Government funded with student fees Online cost: Data not available. Delivering online cheaper than $11 million for 4 years offline. Cost structure (e-learning): Regular course budget. The AGFUND (a regional $4.7 million have been allocated for online content. A development institute) provides 70% of total funding and regular State budget has not yet been developed students’ fees cover the other 30% Reach: Regional National, with some international students from the region Content: Buy in from UK Open University with some local Creates own content and uses learning management adaptation system. Accreditation: Arab Open University Pakistan Virtual University IT strength: Integrated use of ICTs in all aspects of university course Online university offering all courses electronically delivery Bargaining power: No data available Teachers and university management Partnerships: UK Open University, AGFUND, UNESCO Partner with private sector institutions in order to provide access across the whole country Demand: High for University Education in the Arab region High. Strong motivation on the part of students and high student demand Strengths/ Opportunities: Regional reach Weaknesses/ Threats: Low skills base, training needed for university teachers, Lack of quality faculty with local language facility, lack of infrastructure limitations. Regional competition from quality primary and secondary education, pre-university Syrian Virtual University entrance. Lack of face-to-face interaction. Trading opportunities: Recruiting students from the Middle East and North Delivers its courses through a network of private sector Africa; no plans to sell or deliver product partners each with separate ownership. Nationally rather than internationally

E-COMMERCE AND DEVELOPMENT REPORT 2004 128 CHAPTER 4: ONLINE HIGHER EDUCATION: ISSUES FOR DEVELOPING COUNTRIES

Annex II INDICATIVE LIST OF OPEN SOURCE MANAGEMENT SYSTEMS

Product name Sponsor/developer Country of origin Licence type Adept http://adept.sourceforge.net/users/index.html Russian Fed. GPL ATutor 1.2 University of Toronto Canada GPL Bazaar 7 University of Athabasca Canada GPL Bodington University of Leeds UK Bodington System Software License CHEF University of Michigan USA Caroline 1.4 Université Catholique de Louvain France GPL CassWeb 2.0 University of California Los Angeles USA GPL Coursework Stanford University USA dokeos dokeos Belgium GPL eClass.Net Tulane University USA BSD eConf University of Namur Belgium GPL Eduzope/Eduplone Coalition (Infrae, Plone, others) Europe GPL eLecture Online Lecturing System Christian and Thomas Lang (Karl-Franzens- Austria Universität Graz) Eedge 1.2 Chuck Wight (University of Utah) USA GPL eTutor University of Ottawa Canada GPL Fle3 University of Art and Design Helsinki Finland GPL Freestyle Learning University of Münster Germany GANESHA Anéma Formation France GPL H2O Project Harvard Law School USA GPL Ilias University of Cologne Germany GPL Interact Christchurch College of Education New Zealand GPL Interactive Learning Environment (ILE) Brad Cox USA BSD/MIT Internet Course Reader TeleLearning National Centre of Excellence Canada LGPL Jones e-education V2002 Jones Advisory Group USA KEWL University of Western Cape South Africa LearnLoop IT university in Gothenburg Sweden GPL LogiCampus Tap Internet & Tarrant County College USA Custom licence LON-CAPA Michigan State University USA GPL .LRN MIT/Heidelberg USA/Germany GPL OLAT University of Zurich Switzerland Apache style Manhattan Virtual Classroom 2.3 Western New England College USA GPL MmerDesk 1.5.3.1 Ionstream Finland GPL MnITS Internet Teaching System Daniel Bartholomew USA GPL Moodle 1.1 Martin Dougiamas Australia GPL OpenCourse Paul Jones USA GPL Open Learning Management System University of Utah USA ? (O-LMS) OpenUSS University of Münster Germany GPL Segue Middlebury College USA Shadownet University of Missouri-Columbia USA GPL Spaghettilearning.com Italy GPL STeam Univeristy of Paderborn Germany TextWeaver San Diego State University USA GNU Lesser Public Licence (LGPL) Uni Open Platform FernUniversität in Hagen Germany GPL WBT-Master Graz University of Technology Austria GPL Whiteboard Todd Templeton USA GPL

Source: www.edtechpost.ca/pmwiki/pmwiki.php/EdTechPost/OpenSourceCourseManagementSystems.

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 4: ONLINE HIGHER EDUCATION: ISSUES FOR DEVELOPING COUNTRIES 129

References and bibliography

Bell M et al. (2002). Universities online: A survey of online education and services in Australia Commonwealth Department of Education Science and Training. March 2002. Available at www.dest.gov.au/highered/occpa- per/02a/02_a.pdf. Commonwealth of Learning (2003). A virtual university for small States of the Commonwealth. For presentation at the 15th Conference of Commonwealth Education Ministers, Edinburgh, Scotland, October 2003. Available at www.col.org.

Economist Intelligence Unit (2003a). The 2003 e-learning readiness rankings. A white paper from the Economist Intelligence Unit. Written in cooperation with IBM. Available at www.eiu.com.

Economist Intelligence unit (2003b). The 2003 e-readiness rankings. A white paper from the Economist Intelligence unit. Written in cooperation with IBM. Available at www.eiu.com. Harrris M and Yanosky R (2004). Gartner 2003 Higher Education E-learning Survey Review. Available at www.gartner.com.

Hawkins B et al. (2003) EDUCAUSE Core Data Services. 2002 Summary Report. Available at www.educause.edu/ ir/library/pdf/pub6005b.pdf

Hawkridge D (2003). Models for open and distance learning. 2: Globalisation, education and distance education. International Research Foundation for Open Learning. The Commonwealth of Learning. Howell S et al. (2003). Thirty-two Trends affecting Distance Education: An Informed Foundation for Strategic Plan- ning. Online Journal of Distance Learning Administration, VI (III): State University of West Georgia, Distance Education Center. Available at www.wetga.edu/~distance/ojdla/fall63/howell63.html.

Jaeger PT and Burnett G (2003). Curtailing online education in the name of homeland security: The USA PATRIOT Act, SEVIS, and international students in the United States, in “First Monday, Peer-Reviewed Journal on the Inter- net”. Available at www.firstmonday.dk.

Johnston DJ (2004). Education needs to adapt to a changing world. International Herald Tribune, 19 March.

Larsen K et al. (2002). Trade in educational services: Trends in emerging issues. OECD Working Paper.

Mackintosh M (1992). Introduction, in Wuyts M, Mackintosh M and Hewitt T (eds.), Development Policy and Public Action, Oxford, Oxford University Press/Open University.

Ministry of Public Management, Home Affairs, Posts and Telecommunications, Japan (2002). Information and communications in Japan: Stirring of the IT-prevalent society. White paper. Available at www.soumu.go.jp/ english/.

Observer (2004). A little e-learning is a dangerous thing. John Naughton, 21 March. OECD–CERI (2002). Indicators on internationalisation and trade of post-secondary education, OECD/US Forum on Trade in Educational Services, 23–24 May 2002, Department of Commerce, Washington, DC. Available at www.oecd.org/dataoecd/1/5/1933574.pdf.

OECD–CERI (2003). Review of quality assurance and accreditation systems in UNESCO Member States. UNESCO Secretariat. OECD/Norway Forum on Trade in Educational Services: Managing the Internationalisation of post-Secondary Education, 3–4 November 2003, Trondheim, Norway.

OECD–UNESCO (2003). Financing education – Investments and returns. Analysis of the world education indicators, 2002 edition. OECD, UNESCO Institute of Statistics. Available at www1.oecd.org/publications/e-book/ 9603011E.PDF. Paulsen MF (2003). Experiences with learning management systems in 113 European institutions. Educational Tech- nology & Society, 6:, 134–148. Available at http://ifets.ieee.org/perdiodical/6_4/13.pdf.

Paulsen MF (2004). Online Education: E-learning and education available at http://www.publicservice.co.uk/pdf/ nordic/summer2004/NS4%205022%20Morten%85aulsen%20ATL.pdf.

E-COMMERCE AND DEVELOPMENT REPORT 2004 130 CHAPTER 4: ONLINE HIGHER EDUCATION: ISSUES FOR DEVELOPING COUNTRIES

South Centre (2003). Open collaborative project to create public good. Bulletin 62. Available at http://www.south- centre.org/info/southbulletin/bulletin62/toc.htm.

The Observatory on Borderless Higher Education (2002). Online learning in Commonwealth universities. Briefing Note No.7. Available at www.obhe.ac.uk. Tu C and Twu H (2002). The transformation, reform, and prospect of distance education in Taiwan. Society for Information Technology and Teacher Education International Conference, 2002(1): 2461–2465. Available at http://dl.aace.org/11488.

UNCTAD (2002a). Advanced training tools for negotiation of trade in services. Commercial Diplomacy Pro- gramme. January 2002.

UNCTAD (2002b). E-Commerce and Development Report. United Nations publication, UNCTAD/SDTE/ECB/2. New York and Geneva. Available at www.unctad.org/ecommerce. UNCTAD (2003). E-Commerce and Development Report. United Nations publication, UNCTAD/SDTE/ECB/ 2003/1. New York and Geneva. Available at www.unctad.org/ecommerce.

UNESCO (2001). Draft Conclusions and Recommendations of UNESCO’s Expert Meeting on the Impact of Glo- balization on Quality Assurance, Accreditation and the Recognition of Qualifications in Higher Education, UNESCO, Paris, 10–11 September 2001.

UNESCO (2002). Forum on the Impact of Open Courseware for Higher Education in Developing Countries. Final report. CI/INF/IS/2002, UNESCO, Paris, 1–3 July 2002. UNESCO (2004). Global Education Digest 2004: Comparing Education Statistics Across the World. Montreal, 2004. Available at http://www.uis.unesco.org/TEMPLATE/pdf/ged/2004/GED2004_EN.pdf.

UNESCO Institute of Statistics (2004). Enrolment in tertiary education. Available at www.uis.unesco.org.

World Bank (2000). Higher Education in Developing Countries: Peril and Promise. The Task Force on Higher Edu- cation and Society. Washington, DC. Available at www-wds.worldbank.org.

World Education Forum (2000). Regional frameworks for action. Available at www.unesco.org/education/efa/ wef_2000/index.shtml.

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 4: ONLINE HIGHER EDUCATION: ISSUES FOR DEVELOPING COUNTRIES 131

Notes

11. See WTO (2001). Guide to the GATS: An Overview of Issues for Further Liberalization of Trade in Services, Geneva.

12. The following definition is included in Kaplan-Leiserson’s e-learning glossary: “E-learning (electronic learning): Term covering a wide set of applications and processes, such as Web-based learning, computer-based learning, virtual classrooms, and digital collaboration. It includes the delivery of content via Internet, intranet/extranet (LAN/WAN), audio- and videotape, satellite broadcast, interactive TV, CD-ROM, and more”. See www.learn- ingcircuits.org/glossary.

13. The countries covered by the study are Argentina, Brazil, Chile, China, Egypt, India, Indonesia, Jamaica, Jordan, Malaysia, Paraguay, Peru, the Philippines, the Russian Federation, Thailand, Tunisia, Uruguay and Zimbabwe. 14. Oxford Analytica (2004). “Open access” to academic research. Daily Brief, 12 May 2004, www.oxweb.com

15. Open University (2004). Factsheet ‘The Open University Worldwide’. Available at http://www3.open.ac.uk/ media/factsheets/Information%20about%20The%20Open%20University/ The%20Open%20University%20Worldwide.pdf

16. For example, the British Educational Communications and Technology Agency (BECTA) ‘ImpaCT2’ research makes a strong link between investment in ICTs and educational standards. BECTA 2001, www.becta.org.uk 17. Interview with authors at MIT LINC Workshop, March 2004.

18. Survey response from Finnish Virtual University, UNCTAD, 2004.

19. Survey response from Monterrey University Mexico, UNCTAD, 2004. 10. As cited by Bell et al. (2002).

11. As cited by e-learning Brazil (2004). “IDC estima crescimento de e-learning em 35% até 2006”. Available at www.elearningbrazil.com.br

12. Worldwidelearn (2004). Company overview Worldwidelearn. Available at www.worldwidelearn.com

13. NetLearning (2003). Presentation: e-learning Business in Japan, 7 December 2003. Available at www.cn.apan.net/2ABS/elearn.ppt 14. Szucs A (2002). “Expectations, opportunities, achievements, realities: ICTs, e-learning and ODL at universities in Hungary with an insight at Central Europe”. Available at www.oecr.nl/conference

15. elearningeuropa (2004). “e-learning Present Activity in Hungary”. Questionnaire on the Present Situation of e- Learning in the New Countries. Available at www.e-learningeuropa.org

16. IADB (2001). Online education. IDBAmérica, May 2001. Available at www.iadb.org 17. IDB America (2001). Blackboard, television or computer screen?, May 2001. Available at www.iadb.org

18. Dr. Ramesh Chander Sharma (2004), correspondence with authors.

19. MUST (2004). Information available at MUST homepage: www.must.edu.my 20. OECD-UNESCO (2003). Investing in education pays rich dividends confirms OECD/UNESCO study, 26 November 2003. Available at www.uis.unesco.org/ev.php?ID=5373_201&ID2=DO_TOPIC

21. See the William and Flora Hewlett Foundation Annual Report 2001, available at www.hewlett.org, and the Andrew W. Mellon Foundation Annual Report 2001, available at www.mellon.org

22. For further information on the impact of the Internet in the publishing industry, see the E-Commerce and Devel- opment Repot 2002.

23. hr.com (2004) “Interview with David Glue on LMS” Available at www.hr.com

E-COMMERCE AND DEVELOPMENT REPORT 2004 132 CHAPTER 4: ONLINE HIGHER EDUCATION: ISSUES FOR DEVELOPING COUNTRIES

24. HighBeam Research (2004) “LMS Market for US Firms to Grow 12% in ’04 to $529m; Analytics, competency mgmt. are drivers” Lifelong Learning Market Report. 9 January 2004 available at http://static.highbeam.com/ l/lifelonglearningmarketreport/january092004/index.html

25. Bersin (2004) “Learning Management Systems. Market overview” Bersin & Associates March 2004 Available at www.masie.com/event/lmssig/2004_followup/LMS-Masie-3-04_1.2.ppt 26. As cited by Webcite (2004), “Selecting a learning management system”. Available on www.webcite.com.au/ webcontent15.htm

27. For a review of the benefits and implications of FOSS for developing countries, see chapter 4 of the E-Commerce and Development Report 2003.

28. For an expanded list of examples of free and open source software relevant to education see UNESCO’s Free Software portal www.unesco.org/webworld/portal_freesoft/index.shtml 29. See Syllabus News, “Open system and open source LMS: Settling the debate for the benefit of higher education”, by C. Vento. Available at www.syllabus.com

30. For a general overview of legal issues affecting online trade see UNCTAD (2000), Building confidence: Elec- tronic commerce and development. Available at www.unctad.org/ecommerce

31. Presentation at MIT LINC conference, March 2004. 32. “Public good” here is understood as being defined by public action processes, that is purposive collective action, whether for collective private ends or for public ends (however defined); see Mackintosh (1992)

33. See, for example, the Observatory on Borderless Higher Education (2002) Online learning in Commonwealth universities, Briefing Note No.7, August 2002. Available at www.obhe.ac.uk

E-COMMERCE AND DEVELOPMENT REPORT 2004 Chapter 5 E-GOVERNMENT: E-PROCUREMENT AND DEVELOPING E-BUSINESS CAPACITY

A. Introduction tance and time to bring together information from multiple sources, creating the possibility of reorganizing and networking government services to This publication addressed the issue of e-govern- make them more efficient, transparent and user- ment in 2001 (UNCTAD, 2001) and provided a friendly. In addition, the impact of e-government few starting points for countries to take into con- on the economic and social environment is being sideration when launching e-government projects. increasingly explored. E-government initiatives have proliferated since then, and the wealth of related practical and theo- One important way in which the potential bene- retical information has increased exponentially. fits of e-government can be realized is through International attention to the subject was evi- procurement, by which government organizations denced during the first phase of the World Sum- 1 procure/purchase goods and services from the pri- mit on the Information Society (WSIS). Accord- vate sector, advertise their needs, select vendors, ing to the WSIS Plan of Action, e-government manage service and fulfilment contracts, and effect strategies are needed to make public administra- payments. In most countries the public sector is tion more transparent, efficient and democratic, the largest economic actor, whether in terms of creating an enabling environment for maximizing employment, expenditure or revenue. Public e- the benefits of the information society. E-govern- procurement projects can significantly impact on ment applications should also strengthen the rela- the management of these vast resources, and tionship between Governments and citizens, in thereby the overall efficiency of the economy and particular through the use of the Internet. the competitiveness of local enterprises (public and private). However, although most countries E-government aims to make the interaction have some kind of e-government initiative, many between government and citizens (G2C), govern- developing countries do not have the transactional ment and the business sector (G2B) and govern- capabilities needed for public e-procurement. ment institutions themselves (G2G) more convenient, inexpensive and transparent. In this sense, it This chapter will first provide an overview of e- is analogous to e-commerce, which allows busi- government, including services and transactions. nesses to transact with each other more efficiently It will then introduce e-procurement as a service (B2B) and brings customers closer to businesses of e-government and lay out some specific implica- (B2C). For the purposes of this chapter, e-govern- tions of public e-procurement for e-business in ment is Internet-based, providing solutions that developing countries. Lastly, it will address how link the back and the front offices of government, developing economies can maximize the potential including by moving from paper-based to elec- benefits of e-procurement. tronic processes, and always considering the best interest of citizens (citizen-centric). B. Overview of e-government Information and communication technologies (ICTs), in particular the Internet, have the potential to bring about profound changes in the ways Companies and Governments use ICTs to deliver that government is managed and organized, its better services, and a web presence can add value services are provided, and its business is con- through the provision of online services. How- ducted. The Internet can overcome barriers of dis- ever, the public sector has lagged behind the pri-

133 134 CHAPTER 5: E-GOVERNMENT: E-PROCUREMENT AND DEVELOPING E-BUSINESS CAPACITY vate sector in embracing the Internet for this pur- ient for citizens who have growing demands on pose. Early e-government visions were premised their time and have difficulties in attending gov- on the notion that online services would cost less ernment offices. and offer a more efficient and personalized service to citizens, but many of these visions lacked Political considerations also play a role, as Gov- an effective implementation plan (Accenture, ernments re-examine the way they serve their citi- 2003). zens because of higher public expectations with respect to what the Government should provide The implementation of e-government and the and the expansion of the Internet. E-government consequent changes in or reorganization of the increases the accessibility of public administration administration and bureaucracy require thorough for the population, and allows citizens to become deliberation and planning. Owing to the complex- informed at their own convenience and on their ity of comprehensive e-government implementa- own initiative. Although disparities of wealth in tion, at one end of the spectrum several e-govern- developing countries might limit the full benefits ment efforts have been stalled at a basic level, of e-government to some citizens (those that are with an online presence that is limited to provid- "connected"), it can also be argued that increased ing information on government activities and citizen empowerment can free government services. At the other end of the spectrum some e- resources for other purposes such as social devel- government initiatives have resulted in the bun- opment and increasing connectivity. dling of services, accessed through a portal and delivered by the Internet. The ultimate goal is Governments around the world are pursuing e-gov- government service integration, seamless delivery ernment in one form or another. For example, most and electronically mediated procurement of goods European Union (EU) member States have devel- and services. In pursuit of this goal, Governments oped strategies for online government and the EU have realized that successful e-government has stated that e-government is one of its main requires a transformation in the way they operate objectives for the e-Europe initiative. The Euro- and the administrative culture. E-government is pean Commission also benchmarks e-government not just about utilizing the Internet for delivering progress every six months. A recent United government information and services to citizens, Nations report on benchmarking e-government but about taking the conventional structure of confirms that e-governance initiatives around the government and removing the barriers that pre- world are increasing (UNDPEPA, 2002). Such ini- vent the efficient and integrated delivery of serv- tiatives promote the prospect of faster, less costly ices. E-government combines technology, people and more efficient citizen-driven online govern- and processes so as to deliver services in a citizen- ment services. E-government has allowed several centric manner. Governments to use technology to enhance access to and delivery of services to citizens, business part- Economic considerations play a role in the devel- ners and employees (Deloitte Research, 2002). This opment of e-government. New technology may confirms the notion that e-government is not a help reduce the cost of some government activi- shortcut to economic development or savings but ties, but e-government aims to optimize internal rather a tool for achieving these goals (I-Ways, administration costs while at the same time 2002). improving citizen services. Although in the short term e-government may increase some costs, since Chart 5.1 illustrates the e-government prevalence services have to be offered both online and offline, of UN member States in 2001 (UNDPEPA, there are savings and other benefits from stream- 2002).2 Although almost 89 per cent of countries lined business processes, integrated operations and have at least one governmental website, only 19 increased productivity. As the prevalence of per cent have single-entry portals and 9 per cent online services grows in relation to over-the-coun- have online transaction capacity. Forty-four per ter transactions, which usually are costlier in cent have a national government website that can terms of paperwork and staff time, cost reductions serve as de facto single-entry portals, and the same should become increasingly apparent. Other issues percentage have local (sub-national) government such as the opportunity cost of using offline serv- websites. However, UNDPEPA indicates that ices and facilities have also fostered the develop- over 25 per cent of official websites contained one- ment of e-government. E-government is conven- way information (often of a political and/or pub-

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 5: E-GOVERNMENT: E-PROCUREMENT AND DEVELOPING E-BUSINESS CAPACITY 135

Chart 5.1 of information between the citizen and the Gov- E-government prevalence ernment (Deloitte Research, 2002). On the other of 190 UN member States in 2001 hand, developing countries might face some factors that stall the progress of e-government, as shown in table 5.1.

1. E-government services and transactions

E-government projects may include an online capability for non-commercial services as well as for commercial transactions. Non-commercial services may be useful for gaining experience in the development of online systems. Successful online services in developing countries include public information (publication of academic results, information on nearby government facilities, tax self-assessment, online health information, public education content), facilitation of payments (electronic submission of tax returns, payment of fines), and other services (appoint- ments for government services such as the collec- lic relations nature) and did not deliver services to tion of refuse, reporting of crimes). Government or obtain feedback from citizens. services that are well suited to online commercial transactions include applications for identification E-government leaders (often industrialized coun- documents (passport, electoral card) and licences tries) are focusing on delivering benefits through (driver's licence, motor vehicle registration, TV technology and a citizen-centric approach, provid- licence), as well as registration for the collection of ing government officials with customer service taxes. UNCTAD's highly successful Automated training and greater decision-making authority. System for Customs Data (ASYCUDA), which The number of Governments around the world uses ICTs to improve the efficiency and transpar- that are embracing Internet technologies to link ency of customs operations in nearly 100 coun- legacy systems3 and track citizen information is tries, provides an interesting example of the feasi- increasing. This has helped to increase the preva- bility and impact of e-government initiatives in lence of citizen self-service and the two-way flow developing countries.4

Table 5.1 Factors stalling e-government

Factors Symptoms Consequences Institutional weakness Insufficient planning; unclear objectives Inadequately designed systems; cost overruns Human resources Shortage of qualified personnel; lack of Insufficient support; isolation from sources of professional training technology Funding arrangements Underestimation of project costs and recurrent Unfinished projects; higher maintenance costs expenditures Local environment Lack of qualified technical support (vendor Implementation and maintenance problems are representation, back-up systems and/or parts) difficult to resolve Technology and information changes Limited and/or inappropriate hardware and System incompatibility; overreliance on software customer applications

Source: UNPAN (2004).

E-COMMERCE AND DEVELOPMENT REPORT 2004 136 CHAPTER 5: E-GOVERNMENT: E-PROCUREMENT AND DEVELOPING E-BUSINESS CAPACITY

Each of these transactions has an associated proc- routed to relevant officials for authorization. If ess that might be initiated electronically and con- such authorizations can be made electronically, cluded manually. However, to maximize the bene- using digital signatures or some similar approach, fits of the electronic transaction, an electronic processing can be speeded up still further. Individ- response would be ideal. For example, an elec- uals can be informed of the progress or outcome tronic application for a passport should result in of their application by e-mail. Certificates or an electronic communication acknowledging the licences can be collected in person, posted or even application as well as an electronic communica- delivered in a secure electronic format. tion informing the applicant of the outcome (which may be that the passport was posted at a Even if individuals do not themselves have access specific time). to the Internet, they can still interact with service agents at contact centres by telephone or in person The basic level of e-government (providing infor- – in each case the service agents can themselves use mation) is primarily a one-way communication electronic forms and access customer information and does not include any automated transactional databases to initiate service requests on behalf of capability. The response of the citizen or firm still citizens. requires that they visit a government office to collect and complete a form, or telephone a contact At its most sophisticated, a single website may centre for further information. At the next level, provide access to a wide selection of government forms may be made available online for down- services, not just those of a single agency. Informa- loading and printing, but they must still be subse- tion and financial transactions are possible, with quently completed in the traditional way and then the system collecting all relevant information delivered to an office for processing in the tradi- from the user and then processing it seamlessly tional way. Specific inquiries could also be made through a number of interlinked systems of the by e-mail or telephone. various departments or agencies concerned.

Already at this level of the evolution of e-govern- A recent study by Brown University indicated ment, financial transactions may be possible. that only 16 per cent of government agencies These make use of facilities provided by commer- around the world are offering online services cial banks to enable payments to government (West, 2003). While this represents an increase accounts against personal account numbers, or from the previous version of that study, research payments by Governments to suppliers and others shows that Governments have much room for using Internet-enabled electronic banking. Of growth in order to realize the promise of e-gov- course, these are only available to individuals and ernment. On the other hand, some Governments firms with bank accounts and access to the Inter- have developed briskly. Italy, for example, had no net, and forms of payment such as credit cards will high-level targets in 2000 with respect to e-govern- not be available to everyone. ment service delivery (UNCTAD, 2001), but in 2003 it was cited as a model for e-procurement to Two-way information transactions become possi- be exported to other countries. On the basis of an ble when forms are available for completion estimated 23 billion euro ($28 billion) of public online. Government provides information about money spent on acquisition of goods and services the services offered or the obligations of citizens in 2003, it was reported that e-procurement in or firms, and additionally provides the means to Italy would help save an estimated 3.7 billion euro make applications or comply with obligations ($4.5 billion), 21 per cent more than the savings electronically. Organizations can then go through achieved in 2002.5 several stages of sophistication in the way that they process this electronically submitted infor- The decision to place government services online, mation. At the most basic it may be printed out as well as which services, must be the subject of a by a government official and acted on in the nor- number of criteria. For example, the state of New mal way. This is no different from receiving the York (New York State Office for Technology, application through the post or by fax. But if 2001) uses a set of criteria that serve as useful gen- administrative processes have been re-engineered eral guidance for other Governments. They and automated, the submitted information can be include the impact and visibility of the service automatically entered into databases, processed or (expected number of transactions and customers),

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 5: E-GOVERNMENT: E-PROCUREMENT AND DEVELOPING E-BUSINESS CAPACITY 137

Box 5.1 Singapore: Best practice for e-government services

“The vision of the Singapore Government is to be a leading e-Government to better serve the nation in the digital economy.” Deputy Prime Minister Tony Tan at the launch of Singapore's e-Government Action Plan, June 2000

Singapore’s e-service portal http://www.ecitizen.gov.sg/ is a clearinghouse for citizen services and information, with links to practically all Singaporean government websites. The “eCitizen” site provides over 100 services, while other sites contain a large amount of press releases, speeches and databases. The relative prevalence of privacy statements, audio and video clips, and PDA access also puts Singapore's websites ahead of those of other nations in technical sophistication. Two other notable websites are those of the Housing and Development Board and the Singapore Police Force, offering 38 and 17 e-services respectively.

E-government initiatives directly linked to e-business include Singapore's G2B portal http://www.business.gov.sg/, which is the first entry point for all local and international businesses to access a full suite of aggregated and integrated G2B information and services. The portal provides easy and convenient online access to government agencies at all times and saves money and time for businesses. For example, incorporating a new company through the business portal now requires a flat fee of 300 Singapore dollars ($175) and two hours, whereas previously it took from 1,200 to 35,000 Singapore dollars ($700 to $20,400), depending on company size, and two days. This is in line with the Government's drive to promote a pro-enterprise environment and facilitate business growth in Singapore.

In addition, Singapore's e-procurement portal, the Government Electronic Business Centre (GeBiz) at http://www.gebiz.gov.sg, is an integrated, end-to-end online procurement system for the public sector, developed for efficiency/cost saving as well as for strategic reasons, and open to both local and international suppliers. In addition to providing greater consistency and transparency in public procurement practices, the Singaporean Government sees GeBIZ as a stimulus to the development of e-commerce in the country. In 2002, more than 3,800 tenders were issued and 6,500 quotations were published, and the total value of electronic transactions during that year was approximately 262 million Singapore dollars (over $152 million). The number of public sector users exceeds 12,000 (up from 3,000 in 2001) and GeBiz suppliers number approximately 8,800.

Sources: Pascual (2003); West (2003); http://www.egov.gov.sg/g2b.htm.

the ease of implementation (level of difficulty, Communication and collaboration systems, such length of implementation, staff requirements), as e-mail, voice mail and conferencing, are rela- revenue and cost and, equally important, the tively easy to introduce. E-mail is ubiquitous and impact on the citizen (does it impact economic available to anyone with a computer and an Inter- development, improve the quality of life, promote net connection. Participation in discussion forums health/safety?). This last criterion is essential to or the use of chat systems, which can be used for the citizen-centric vision of e-government, which propagating knowledge within government is exemplified in box 5.1 by Singapore, a best prac- offices, does not require additional capital expend- tice for e-government services. iture. Digital communication in government allows rapid distribution and sharing of docu- 2. E-business systems and infra- ments at almost no incremental cost, as well as structure storage and retrieval, with a high potential for reduction of costs such as paper distribution. As is the case in other large organizations, e-busi- Widespread adoption of communication and col- ness systems can improve the exchange and man- laboration systems in the public sector requires agement of information within Governments, as that employees have access to the necessary tools – well as their delivery of services. E-business sys- networked computers, digital telephone systems, tems that are particularly relevant to e-govern- and so forth. In addition, portals providing infor- ment are those that help integrate the front and mation about and access to government services back office of government, namely communica- can form the basis of transactional systems, start- tion and collaboration systems, internal business ing with customer requests for information systems and e-commerce systems. (including inter-agency), and progressing to the

E-COMMERCE AND DEVELOPMENT REPORT 2004 138 CHAPTER 5: E-GOVERNMENT: E-PROCUREMENT AND DEVELOPING E-BUSINESS CAPACITY electronic distribution of forms and the online significant numbers of citizens may not have submission of applications. ready Internet access. Therefore, an e-government strategy should also consider the development of Internal business systems include resource plan- the implementation environment (the level of ning, customer relationship management and public access, the ICT sector, and e-government human resource management systems. These skills), and the enabling of alternative information improve the management of information within and communication channels. Citizen access to e- government by centralizing access and storage of government may be provided by "gateway" call data in a single network. Updates are shared, and centres (single point of access) and walk-in centres information is distributed along standardized distributed throughout a country. Box 5.2 show- workflow paths. Analytical and other procedures cases the example of Tshwane Metro, a municipal- such as invoice generation or reporting can be ity in South Africa that made a successful decision automated. Internal business systems are particu- to invest in e-government infrastructure. larly useful in organizations such as government that operate from multiple locations. However, Cost-saving justifications for adopting e-business Governments may find such systems costly when systems in government are also supported by there are paper-based processes that work and some intangibles. The implementation of e-gov- there might be other pressing developmental ernment implies benefits from process re-engineer- needs. In addition, the success of such systems ing in terms of efficiency, from developing/ requires the reengineering of entrenched bureau- improving capabilities in forecasting and plan- cratic procedures. The benefits derived can only be ning, and from the learning opportunity related to justified if there is an accepted need to treat the management skills and technologies. In addition, public as customers, improve service delivery and it may be argued that the failure of developing improve internal efficiency. countries to adopt e-government will further exac- erbate the notorious digital divide and reduce the E-commerce systems enable G2B or G2C transac- global competitiveness of their economies. tions, the former of which may include electronic order placement and payments to suppliers. An Therefore, key principles that e-government must appropriate transaction processing system can adhere to are that: (i) services should be built help Governments to, for example, overcome around citizens’ choices; (ii) government services lengthy procedures for payment to suppliers and should become more accessible; (iii) social inclu- facilitate the payment of taxes and other levies by sion should be facilitated; (iv) information should citizens. be provided in a responsible manner; and (v) government resources should be used effectively and The costs involved in establishing e-business sys- efficiently (UNDPEPA, 2002). tems in government organizations, including the cost of related infrastructure, should be counter- balanced by the interests of the community, C. E-procurement ensuring that effective delivery of services is achieved at the lowest optimal cost for users. Like Private procurement and public procurement businesses, Governments must make difficult have a fundamental difference. While a private resource allocation decisions: how best to make company may wish to have a fair and open proc- use of limited resources to achieve defined goals. ess in order to obtain the best possible price, the Developing countries may prioritize other public sector has a duty to its citizens to use open demands on resources, such as poverty alleviation and transparent procedures that can bear scrutiny programmes, low-cost housing or public health for fairness. issues, which may overwhelm arguments for investing in e-business systems, even if such sys- Therefore, an open public procurement process tems will contribute to managing those govern- should seek to ensure that all interested suppliers mental priorities. are aware of tenders, and that no one respondent has any kind of advantage as a result of, for exam- In addition, developing countries will be con- ple, inside information. Transparency requires cerned about the relevance of e-business systems clear and unambiguous requirements for a tender for placing services and transactions online, when submission to be considered, and the evaluation

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 5: E-GOVERNMENT: E-PROCUREMENT AND DEVELOPING E-BUSINESS CAPACITY 139

Box 5.2 South Africa: Successful investment in e-government infrastructure

Tshwane Metro is a municipality of Pretoria, South Africa. It has more than 15,000 employees spread across multiple geographical locations. In 2001 as a part of its e-government strategy, it began to rationalize its telecommunications network and reduce reliance on Telkom, the national telecoms provider, through network consolidation and reduction of administrative and technical overheads. Prior to the rationalization project it had separate management of its voice services (supplied by Telkom) and data networks (WAN links also from Telkom), as well as electricity telemetry networks, mobile phone routers and other infrastructure. The Administration had more lines than it needed and an unacceptable level of costs. The Administration adopted a far-reaching strategy based on user needs, legal options opened up by the terms of a Private Telecommunications Network (PTN) licence available from the Independent Communications Authority of South Africa (ICASA) and technology developments. All Metro facilities (buildings) are linked in a single, privately owned network that carry all traffic; thus no "internal" traffic (between Tshwane Metro staff and information systems) crosses the Public Switched Tele- phone Network (PSTN). Technical and administrative control is greatly enhanced. A single switchboard (PABX, which is a private automatic branch exchange or voice server) was established for all incoming calls into Tshwane Metro, which greatly simplifies both administration and technical management. User policy is also uniform across the organization. Outgoing calls are routed to either the PSTN or directly to mobile phone networks as appropriate. A single 4MB Internet connection is used for e-mail to third parties and web browsing. Internet Protocol is used to carry voice calls within the Metro network. Net cost savings of approximately 5 million rand ($790,000) per month were realized through a combination of reduced Telkom costs, removal of redundant systems, more efficient management, better uptime and associated improved productivity. Net- work rollout has been funded through these cost savings. Despite reduced cash flow during the installation period, operational expenditure savings have recovered the initial capital expenditure. The estimated payback period for the 80 million rand ($12.6 million) investment is 24 months. Other benefits are a faster service (bandwidth prioritizes voice applications), which is more flexible and user-friendly (every council employee is available on a extension; the phone number directory is directly linked to the HR database and published on the intranet), and has allowed for operational rationalization. In other words, Tshwane now has a major asset rather than a recurrent expense. With such telecommunications infrastructure in place, Tshwane and places like it are in a far better position to attract investment in the form of new companies or the expansion of existing facilities. E-government telecommunications networks and related facilities, accompanied by local ICT service providers, can thus make cities and regions more attractive business locations by helping government to function and supply services more efficiently, including e-procurement, and contribute to an environment for business competitiveness.

Source: Interviews with Herman Claassen, Facilities Manager (Telecommunications Networks), City of Tshwane; and Michael Smales of Bytes Communication Systems. February 2004. and awarding of subsequent contracts must follow E-procurement is one of the first areas in which an established, consistent and documented proce- Governments entering into the transactional dure. The requirements should be reasonable and phase of e-government tend to venture. The trans- capable of being met by any qualified respondent, actional phase is when the Government is capable and the individuals responsible for evaluation of making services available online and transacting should have no pecuniary or other personal inter- with other parties (World Bank, 2002). There are est in the outcome. Additionally, procurement incomplete statistical data on the e-procurement processes should strive to be responsive by deliver- market worldwide, although it can be generally ing prompt decisions and communicating these asserted that government is usually the largest pur- decisions to all concerned parties in reasonable chaser in an economy and that the value of the time. Providing feedback about winning bids is an market is of significant importance to national important market signal that enables prices to be economies (see subsection 5 below, “E-procure- continually adjusted and so ensures a competitive ment as an enabler of e-business”). Data are availa- market. E-procurement systems can help to ble for some e-government leaders, namely for the ensure that public procurement meets these stand- North American markets and the European ards in the following ways. Union. For example, in 2002 the total EU public

E-COMMERCE AND DEVELOPMENT REPORT 2004 140 CHAPTER 5: E-GOVERNMENT: E-PROCUREMENT AND DEVELOPING E-BUSINESS CAPACITY procurement market was worth 1.5 trillion euro The formulation of goals ensures that e-procure- ($1.8 trillion) or over 16 per cent of EU GDP ment strategies have a valid rationale, clarifies the (European Commission, 2004). According to the establishment of their “business case” and will Organisation for Economic Co-operation and help identify expected benefits. Explicit goals Development (OECD), the ratio of total procure- determine the scope and nature of the e-procurement (consumption and investment expenditure) ment strategy, as well as of its development and for all levels of government in OECD countries implementation. was estimated at almost 20 per cent of 1998 national GDP (or $4.7 trillion), and at approxi- Phase 2 – Regulatory framework. Once the mately 14 per cent ($816 billion) for non-OECD goals and vision of an e-procurement strategy are countries (OECD, 2002). The OECD estimated clear, there needs to be stocktaking of the procure- that total government procurement worldwide in ment regulatory framework, including statutes, 1998 was roughly equivalent to 82 per cent of case law and administrative laws (Steinberg, 2003). world merchandise and commercial services The identification and analysis of the regulatory exports. framework will identify any bureaucratic impedi- ments to e-procurement or conflicts with public 1. Developing an e-procurement sector purchasing laws. strategy Phase 3 – Analysis of existing processes. A With respect to the difficulties related to the review of existing procurement processes must implementation of public e-procurement, it include an assessment of the procurement needs of should be noted that success is always the result of the Government and determine its readiness to a broad consultation with representatives from implement e-procurement. It should also include government agencies and the private sector. A key an audit of government spending, an analysis of objective of a strategy for all countries is to ensure the items procured, an analysis of supplier pro- that e-procurement is approached consistently files, and an assessment of staff capabilities and across all spheres of government and costs to sup- skills. pliers are minimized. Furthermore, the process of Phase 4 – Process re-engineering. Following the developing an e-procurement strategy should go review of existing procurement processes and the through a series of phases, each of which requires identification of bottlenecks or inefficiencies, a re- careful consideration. engineering plan should be drafted with a view to achieving the goals and vision defined in phase 1. Phase 1 – Goals and vision. A strategy for public Such a plan requires a decision on areas or proc- e-procurement needs to establish its main goals esses that can or should be automated as a priority, and vision, which might approximate the follow- as well as item categories that are suitable for e- ing: procurement. • To automate the Government’s procure- Phase 5 – Choosing a solution and platform. ment process and reduce duplication in pur- Choosing the correct solution and platform will chasing; require a cost-benefit and/or risk analysis to com- • To achieve procurement transparency and pare various e-procurement solutions and their accountability from an open system; impact. Developing countries may benefit from exploring open system solutions and non-proprie- • To reduce procurement costs and ensure tary software, which are interoperable and scala- that government obtains better value for ble through all government agencies. A business money from its suppliers; case must accompany the solution chosen, and • To increase the number (and thus the must consider among other things the implica- choice) of government suppliers; tions of charging a fee for suppliers to access the e- procurement system. • To provide all enterprises, including small and medium-sized enterprises (SMEs), equal Phase 6 – Formulation and implementation of a access to government procurement informa- plan. The formulation and implementation of the tion and equal opportunity for participa- chosen e-procurement solution will include the tion. allocation and management of adequate resources

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 5: E-GOVERNMENT: E-PROCUREMENT AND DEVELOPING E-BUSINESS CAPACITY 141

Chart 5.2 Steps to e-government and e-procurement: The Finnish model

(financial and human resources). In addition to and there is optimal participation and empower- technical training of human resources, implemen- ment of all users (purchasers and suppliers). tation will often entail empowering lower-level management to take decisions (thus training for However, it should be noted that an initial e-pro- new responsibilities is also needed). Training is curement strategy for a developing country does particularly important in order for government not necessarily entail a comprehensive e-procure- users to understand the benefits of the system and ment solution – such as an electronic tendering to change management cultures related to previ- system, an electronic market place for the pro- ous procurement processes. Cost savings could be curement of goods and services online, or a gov- undermined if a system is not utilized to its full ernment website that provides a single point of potential. In addition, the solution must be pro- entry to all government business opportunities. moted among current and potential suppliers. The implementation of e-procurement may begin with a single improvement, such as posting online In order to implement its e-procurement strategy, updated tender information. the Government of Finland applied a model that follows seven steps towards e-government and e- procurement, in which each step is associated with 2. The role of open technologies and a level of transaction capability, as shown in chart proprietary solutions 5.2 (Finland Government, 2003). To be sure, any e-procurement system will require The Finnish model shows the increased sophistica- a high level of interoperability, which can be tion of each level of e-procurement, from network enhanced by the use of open technologies and is presence providing only tender contact informa- consistent with the aims of making those systems tion online (step 1) through to allowing the elec- more cost-efficient, open, transparent and tronic application/submission of tenders and accountable (Dravis, 2003). Interoperability in the authentication of transactions (step 5), and their design of e-procurement systems helps to ensure administrative follow-up (step 6). In step 7, fully that no potential bidder is excluded because it does supported and seamless e-procurement allows end- not use the same computer systems and applica- to-end electronic automation of all previous steps, tions as the Government.

E-COMMERCE AND DEVELOPMENT REPORT 2004 142 CHAPTER 5: E-GOVERNMENT: E-PROCUREMENT AND DEVELOPING E-BUSINESS CAPACITY

Box 5.3 The e-GP portal: A guide for developing countries

At the beginning of 2003, an electronic government procurement (e-GP) working group was created under the Multilateral Development Banks (MDBs) Procurement Harmonization Process. The e-GP website at http://www.mdb-egp.org/ was launched in March 2004 and is jointly sponsored by the Asian Development Bank, the Inter-American Development Bank and the World Bank. It provides a single point of entry to all the information developed and all the tools created under the e-GP Working Group. Such information, including a tool kit, is aimed at helping countries plan and benefit from their e-procurement strategies and achieve benefits. The e-GP tool kit provides strategic guidelines on the planning, management, implementation and support of public e-procurement. The planning guidelines refer to the development of a country's institutional base, making a diagnosis of the current procurement environment, the elaboration of a strategic plan, the selection of adequate standards, and the elaboration of a road- map for the implementation of public e-procurement that incorporates best practices from around the world. The website also has an e-procurement interactive map that provides country-specific information on e-procurement practices, including success stories and lessons learned.

Source: http://www.mdb-egp.org/.

An example of successful use of open standards for (DPWS) successfully developed its own e-procure- e-procurement may be found in the United King- ment system, which was put at the service of Syd- dom.6 The Office of Government Commerce ney Water, the country's largest water utility serv- (OGC) recently launched a single IT language for ice provider (New South Wales Government, government suppliers to conduct business with 2002). the public sector. The language is based on the OGC interoperability requirements and an open Furthermore, free and open-source software standard (BASDA eBIS-XML or the Business (FOSS) used by Governments for e-procurement Application Software Developers Association's e- processes does not require suppliers to adopt or business interchange standard extensible mark-up convert their data into a proprietary format, language) and will be used by public sector bodies which may increase the costs of suppliers and con- for electronic invoicing and ordering. It should be stitute a barrier to smaller companies. FOSS has noted that adaptations of BASDA eBIS-XML are other features that are worth considering when currently being used by over 100 organizations investing public funds in e-procurement systems, across Europe. The adoption of a single standard such as availability to the public, maximal choice, in the United Kingdom has helped overcome diffi- no royalties or inflexible licences, and reduced dis- culties in exchanging information and conducting crimination against users. In addition, the use of business effectively between suppliers and public FOSS may encourage ICT spending with local sector customers who used different IT systems. companies, support local SMEs in the ICT sector, Government departments and their suppliers enhance local knowledge of "primary source" found the technology very easy to implement and material (i.e. source code), and impact on the use. Other benefits from using e-procurement in application of broad standards and mechanisms the United Kingdom include contractual savings, for collaboration, quality assurance and the distri- current financial information on what is being bution of ICT products (i.e. software standards). spent with each supplier, lower levels of irregular FOSS is also adaptable to user profiles, such as in purchasing, and improved commercial relation- the case of adapting to local languages (e.g. ships with suppliers. www.translate.org.za). A detailed analysis of the implications for FOSS for ICT policy and devel- There have been some examples of in-house development can be found in chapter 4 of the E-Com- opment of e-procurement systems within govern- merce and Development Report 2003 (UNCTAD, ment. The Manchester City Council in the United 2003). Kingdom is engaged in in-house development of an e-procurement system with a direct ordering facil- Of course, proprietary e-procurement solutions ity.7 Australia’s Department of Public Works remain an option for Governments. For example,

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 5: E-GOVERNMENT: E-PROCUREMENT AND DEVELOPING E-BUSINESS CAPACITY 143 the Philippines’ government has entered into an services over the Internet and currently offers four agreement with Microsoft for the acquisition of modules (central contract, direct purchase, request products and licences.8 The agreement provides for quotation and request for tender) as well as government agencies with a simplified way of access to an electronic catalogue. E-Perolehan was ordering and acquiring Microsoft products and financed through a BOT scheme involving an e- licences while being able to track software licence commerce joint venture company bringing acquisitions through online order confirmations together Puncak Semangat Sdn. Bhd. and NTT and summaries. For the Government, acquiring Data Corporation, which undertook the total original, proprietary software and licences symbol- financing of the project in exchange for exclusive izes support for intellectual property rights legisla- service operator rights to the Malaysian supplier tion and a stand against software piracy; it also community. Suppliers can host their products and allows it to benefit from Microsoft advice and the prices online free of charge, thus reducing their latest technology. In this case, the vendor becomes overhead costs, while the Government benefits a strategic partner in e-procurement that will assist from a streamlined procurement process and read- in the development of the system and enable the ily accessible pricing information. Government to properly manage and maximize its resources. Annex I contains a brief overview of the In the first quarter of 2004, e-Perolehan had main e-procurement vendors worldwide and their approximately 51,000 registered suppliers, of products. which about 12 per cent were ready to conduct business with the Government. It is expected that The cost of commercially available e-procure- by the end of 2004, there will be 60,000 registered ment solutions will depend on whether the solu- suppliers, 39 per cent of which will be ready to tions involve applications that are focused on conduct business with the Government. The value sourcing activities (e.g. bidding, supplier registra- of transactions by the end of 2004 is estimated to tion, tender management) or purchasing activities reach 1 billion Malaysian ringgit ($260 million), (e.g. electronic invoicing and payments), or both. with expected growth as adoption of the system When building an e-procurement solution, the expands. The average cost per transaction has been following costs will have to be considered: licens- reduced from $250 to an average of $17. ing (software costs are believed to be only 10 per cent of the overall project costs), external and 3. Costs and benefits internal resources, implementation and maintenance, integration into existing resource planning Certainly, there are tangible benefits flowing from solutions, process design, configuration and cus- e-procurement in terms of reduction of prices tomization, training and communication, internal (through competitive bidding and transparent systems and bandwidth, software upgrades, and negotiation with suppliers) and process costs. reorganization costs (Buy IT, 2002a). From the Nonetheless, the achievable return on investment point of view of infrastructure, however, e-pro- (ROI) of e-procurement projects remains an elu- curement solutions can be stand-alone, with no sive equation. Early corporate adopters of e-pro- more than a data interface with back office sys- curement claimed savings of between 8 and 15 per tems. This is often seen as an interim solution cent and returns on investment in under a year; until integration of all resource planning plat- however, these figures are now becoming more forms has been achieved, such integration provid- realistic (Buy IT, 2002b). Initial annual savings ing the greatest transaction cost benefits. Of may be roughly twice the investment costs, but course, the size of the public sector, in particular once strategic sourcing starts to mature and is fac- national budget and expenditure, must be large tored in, cost savings are reduced. The main sav- enough to sustain (make viable) the implementa- ings drivers for public e-procurement are the same tion of an e-procurement system. as for corporate e-procurement (transactional benefits, compliance benefits, management informa- An option for financing the implementation of e- tion benefits, price benefits and payment benefits), procurement is a build-operate-transfer (BOT) always compounded by the imperative of serving scheme, such as the one adopted by the Govern- the citizen. Users of e-procurement systems could ment of Malaysia in order to set up its e-procure- maximize short-term benefits by limiting initial ment system e-Perolehan.9 The system allows the deployment, focusing on smaller categories first Government of Malaysia to purchase goods and (e.g. office supplies) and on helping suppliers by,

E-COMMERCE AND DEVELOPMENT REPORT 2004 144 CHAPTER 5: E-GOVERNMENT: E-PROCUREMENT AND DEVELOPING E-BUSINESS CAPACITY for example, offering payment upon receipt of needed are able to draw from a larger pool of tal- notice of shipment. ent, and to choose the most appropriate ICTs for each project. This will come at a higher cost, but Other benefits of e-procurement are in the areas of the quality of each project should be better. The governance and administration. With respect to development of ICT skills for e-procurement governance, e-procurement facilitates the imple- should be driven by expected functionality and mentation of transparent public decision-making needs, to be translated into system specifications and is an impediment to lack of compliance and to and requirements (i.e. the "mechanics" of e-pro- corruption. In terms of administrative processes, curement). e-procurement may reduce bureaucracy (including “overheads”, or money spent on administration of 4. Mechanics of e-procurement services rather than their delivery) and save expenses and time. It will also impact on the level There are four basic elements to e-procurement, as of ICT skills among all system users. follows:

The development and implementation of e-pro- • Online tenders: Potential bidders should be curement in an e-government strategy depends on able to search and identify tenders easily. public stakeholders being able to tap into appro- Online tenders enable suppliers to have real- priate ICT skills. The skills needed for any IT time access and the Government to reduce implementation include ICT strategy develop- paper and printing costs. Tender forms ment, master systems planning and project man- might also be available online and might be agement, business modelling and process analysis, submitted electronically, or through an requirement analysis and system specification, automated process. application design, application development, including implementation and testing, configura- • Electronic invoices: Where regulations and tion and change management, and deployment resources allow it, invoices might be and impact assessment. These high-level skills are received electronically. a prerequisite for any programming or implemen- • Electronic payments: Electronic funds tation. Since government is often already the sin- transfers may require the approval of pay- gle largest employer in a country, it may also be ments through authenticated digital signa- the single largest purchaser of IT and has consider- tures and a process management system. able potential to stimulate the development of IT skills (whether employed internally or by con- • Automated process integration: End-to- tracted suppliers) through e-government projects. end e-procurement requires electronic auto- For example, a procurement policy that requires mation of all of the above elements. See applications to make use of open source software annex I for a list of the major suppliers of will stimulate the development of open source these systems. skills and the adoption of open source business Electronic communication can help to ensure that models in the local IT industry. all interested suppliers are aware of tenders. Ten- der notices can be posted on a website (rather than Human resources for the development of e-pro- a physical notice board or published in a newspa- curement (or an e-government strategy for that per) that is accessible at all times, without the need matter) may be permanently hired and so reside to physically visit a government office or sub- inside the organization, or be contracted from the scribe to a publication. Tender notices can be cate- private sector as needed. Each approach has mer- gorized on such websites to help potential bidders its: large organizations may be sufficiently diverse easily find those that they are most interested in. and of a scale to be able to make use of the full More proactively, tender notices can be sent by e- range of skills on a full-time basis and avoid the mail to registered suppliers who have previously premium charged by contractors. But even large expressed an interest (and proven capability) in organizations are unlikely to be at the "cutting specific categories of tender – construction, train- edge" of all ICTs, and so may find themselves una- ing, or consulting, for example. Tenders should ble to identify or make use of the most current or facilitate the registration of bidders, including for appropriate skills and technologies. On the other those geographically distant from government hand, those that choose to contract skills as offices. Electronic communications methods can

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 5: E-GOVERNMENT: E-PROCUREMENT AND DEVELOPING E-BUSINESS CAPACITY 145

Table 5.2 Best practice in e-procurement functions

Function Best practice Alternative Quoting/tendering process Open tender – buyer advertises the business Buyer accepts inquiries and sends tender opportunity online free of charge. documentation by e-mail. Closed tender – buyer advises selected suppliers of the inquiry/tender. Buyer makes the tender information available online and (where applicable) allows the suppliers to submit their tender documentation electronically. Ordering from the supplier Buyer transmits orders to the supplier using open Buyer orders directly from a catalogue (e.g. from standards (agency must negotiate a contracted rate supplier website or e-mail offer) using e-mail, fax with supplier that is lower than the once off ordering or hard copy. Agency negotiates a contracted rate price) with supplier that is lower than the one-off ordering price. Making payment Buyer pays suppliers by electronic means, e.g. Payment made electronically and receipt sent by through direct transfer – receipt sent electronically. post. Liaising with suppliers Buyer and supplier liaise via secure e-mail. Buyer and supplier liaise via e-mail and fax. Browsing supplier catalogues Supplier maintains an online catalogue, which can If supplier cannot establish an online catalogue, a be browsed electronically (self-hosted or within an buyer (government agency) may accept catalogue e-marketplace). data electronically and upload then into shared internal systems, if cost-effective. Internal approval process The approvals process is automated and im- The internal approval process should be plemented electronically. documented and objective criteria put in place for approving orders. Receiving invoices/statements The agency requires all suppliers to submit their Objective criteria implemented for approval of invoices electronically and the invoice is then payment to suppliers on receipt of paper or e- matched with the order. mailed invoice. Invoice approved electronically. Accessing e-marketplaces Buyer accesses supplier catalogue in an open Buyer accesses supplier catalogue in a closed marketplace (open access, based on open marketplace (using a closed marketplace will standards). make accessing the information more cost- effective for the agency concerned).

also be used to distribute tender documents, mak- tender. Once this is done, it should be reasonable ing them available for download and instantly for tender submissions to be submitted digitally. reducing the waiting time for a bidder to receive Provided that they are in the required format (pref- such documents. The websites for tender notices erably non-proprietary), this presents no technical and documents should provide information about problems other than the competent use of e-mail procedures, so that everyone can be confident that and an electronic filing system. they are being treated equally, and officials can be held to a common standard. Once suppliers have been contracted, e-procurement systems can also be usefully employed to The submission of tenders can be more complex as ensure compliance with procurement policies. it may involve the bidder in including certificates Doing so enforces standardization throughout an or other documentation proving competency or organization, with resulting benefits through compliance with some other requirement, such as lower prices because of guaranteed volume; tax affairs being up to date. This potential problem reduced costs and better service because of stand- can be reduced by requiring bidders to register as ardized maintenance of a reduced range of equip- approved suppliers so that they do not need to ment; and reduced overheads associated with deal- prove their competency ever time they submit a ing with a limited number of suppliers.

E-COMMERCE AND DEVELOPMENT REPORT 2004 146 CHAPTER 5: E-GOVERNMENT: E-PROCUREMENT AND DEVELOPING E-BUSINESS CAPACITY

E-procurement systems are best used for the pur- ment plays a role as an enabler of e-business, chase of those goods and services that are needed by including for SMEs. In an European survey, firms all departments across the organization. These are with 50 or more workers felt that electronic media typically commodities and include office supplies, and e-procurement were the solution to the heavy computers and related equipment, maintenance procedural costs involved in bidding for public services, and such items as meeting rooms and tenders, but small firms did not mention elec- travel. Those things required for the operations of tronic solutions as a way out of the problems they specific departments – civil engineering services for faced in these markets (European Commission, the construction of a new road, for example – are 2004). The EU promotes the use of e-procurement more specific and specialized, and cannot benefit in order to achieve cost reductions for firms and from the economies of scale that an e-procurement authorities, increase transparency and procedural system requires in order to justify its cost. efficiency without prejudice to competition, and allow easier cost comparisons and examination of E-procurement systems typically run on an tenders within the European Community. At the intranet,10 on which catalogues of goods and serv- same time, it warns that the upfront costs of shift- ices can be made available, purchases requested ing to e-procurement should not be underesti- and approved, purchase orders generated (for mated either for firms or authorities and may rep- external vendors) or works orders (for internal resent an obstacle for smaller firms, and that services) routed through the intranet or by e-mail national uncoordinated e-procurement solutions to the appropriate supplier. Once supplied, deliv- could “fragment” the market.12 ery notes are reconciled with purchase orders and invoices, and payments are made and allocated. As a large purchaser, government is an attractive Purchases and moves can also be linked to asset customer for large and small suppliers alike. The management systems to keep track of the location introduction of effective e-procurement systems and condition of assets, and depreciation costs by Governments may impact on the local econ- allocated accordingly. omy both internally and in the way that it trades with others. Procurement processes that are open As explained above, Governments in developing and transparent can help to set lower market countries must be aware that e-procurement does prices and drive down costs, favouring efficient not necessarily mean a comprehensive e-procure- producers. This might attract low-cost producers ment solution; rather, it could entail cost-effective into the market to the benefit of all consumers process improvements that steer a government and encourage local suppliers to improve their department in the direction of e-procurement and competitiveness (quality and efficiency) in the are tailored to the available resources. For exam- domestic and/or international trade. ple, orders can be placed by e-mail, or via an integrated online order management system that Part of the developmental role of government is extends across the length and breadth of the sup- to ensure the provision of key economic infra- ply chain. Table 5.2 lists a number of procurement structure – roads, electricity and other utilities, functions viewed from a “best practice” and “alter- ports, health facilities, and so forth – that enables native” perspective.11 The “best practice” column or supports business formation, investment and will generally require the implementation of a growth. As Governments – especially at the local comprehensive e-procurement system with an level – move more of their own processes online, ideal level of resources, and the “alternative” col- they also find it attractive to build telecommunica- umn can be an option for countries with more tions networks to link buildings and other facili- limited resources. ties (see box 5.2). It can be argued that open and transparent procurement processes can help free funds to be channelled into economic infrastruc- 5. E-procurement as an enabler of ture, ensuring that it is of good quality and has e-business been purchased on the best conditions and/or at the best price. Finally, efficient online transactions Since there are limited data on the e-procurement with government agencies can act as incentives for market, there little evidence regarding the impact businesses of all sizes to install computers, of e-procurement on e-business. Nonetheless, improve networks and build up basic ICT infra- increasingly there are indications that e-procure- structure and skills. If more business processes are

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 5: E-GOVERNMENT: E-PROCUREMENT AND DEVELOPING E-BUSINESS CAPACITY 147

Box 5.4 A local, low-cost and open solution in South Africa

The Knowledge Economy E-Government branch of the Western Cape Government in South Africa uses both traditional and new electronic channels to advertise tenders and reach a broader range of suppliers, especially SMEs in the ICT sector. Com- panies that collect tender documents register in order to provide a contact, receive information on the tender and ensure an audit trail. The webpage http://capeonline.org/cmstender contains the tender documents and instructions on how to use them. Tenders are submitted through the traditional process, while invoices are submitted electronically and printed out. The printed uoriginal” is processed through the traditional process. A small local software development company provided the solution used by the Western Cape Government, which turned out to be a cost-effective alternative to imported "customizable" software since the system could be built up using open source software. The Government incurred little or no extra cost for the use of the technology in the enhanced procurement process. All the staff had access to e-mail and the organization already owned a couple of Internet-connected web servers, which was all that was required.

Source: http://capeonline.org/cmstender.

computerized, automated or moved online, this can remain in the local economy. In addition, might encourage a virtuous circle of investment in public sector procurement could favour open ICTs accompanied by more efficient local busi- source solutions, as these tend to better encourage nesses. In fact, an e-procurement strategy should local skills as well as costing less. Box 5.4 illus- explicitly promote the use of the Internet and e- trates the use of open source principles for an e- business systems among potential suppliers. The government content management system that potential to win government contracts could act enhances existing processes and promotes local as an incentive for firms to adopt ICTs for busi- ingenuity. Table 5.3 outlines the implications of e- ness purposes and to go online. procurement for e-business.

E-procurement systems could also force local play- E-procurement allows more fair and equitable ers to face foreign vendors that might compete on access to government contracts by a wider range financial or strategic terms. That said, many multi- of companies, as tenders and other requests for national vendors have sought to establish partner- supply are more likely to be seen by potential sup- ships with local companies in the more attractive pliers. In addition, submission of responses is less markets, so that some of the implementation costs onerous and more convenient for the potential

Table 5.3 Implications of e-procurement

Implications of e-procurement for: Development of e-commerce and a national electronic market- The incentive for building an electronic marketplace is reciprocal with (and place. proportional to) increasing IT penetration and capability (Oliveira and Amorim, 2001). Local business promotion The selection of local suppliers can be encouraged, including SMEs. Public resources Internal coordination costs can be reduced and public resources freed to serve citizens in other areas. Bureaucracy E-procurement will help to expedite and/or overcome bureaucratic procedures. IT readiness E-procurement will require a scaling up of the IT readiness of government and enterprises. Transparency All vendors have equal bidding opportunities. Business processes and regulations E-procurement might require changes to business processes (e.g. regarding vendor minority participation) in order to comply with public sector purchasing laws and regulations.

E-COMMERCE AND DEVELOPMENT REPORT 2004 148 CHAPTER 5: E-GOVERNMENT: E-PROCUREMENT AND DEVELOPING E-BUSINESS CAPACITY vendor. In this context, increased SME participa- • Auctions and prices are open for inspection tion in the supply of goods and services to govern- by the public, and auction results are posted ment agencies should contribute to reducing the immediately. power of monopolies or favoured suppliers. The use of e-procurement systems could also reduce COMPRASNET was introduced to automate the the bias towards urban businesses and open doors Government's procurement process, in order to to suppliers in rural areas or non-capital cities/ make it uniform without centralizing the buying towns. process of the Federal organizations. It was also intended to reduce procurement costs and give more transparency to the process. Other aims 6. Case studies in e-procurement were to increase the number of government suppliers; to reduce participation costs for these sup- Brazil pliers; and to increase competition among suppliers, which should result in cost reductions and COMPRASNET is the Brazilian Government's e- better quality of goods and services acquired. procurement system, set up by the Secretariat of Logistics and Information Technology in the Bra- Stakeholders include Federal Government agen- zilian Ministry of Planning, Budget and Manage- cies and organizations, as well as the suppliers of ment.13 The system is a Web-based online pro- goods and services to the Federal Government curement system used by all Federal Government (over 150,000 registered suppliers). Citizens are procurement units. It enables online price quot- indirect stakeholders insofar as e-procurement is ing and reverse auction commodity purchases, and intended to provide an instrument for social con- it has a client/server architecture. The process is as trol of public expenditure, through its public follows: transparency.

• Federal Government organizations register During COMPRASNET's first three years the their procurement needs (i.e. goods and Federal Government spent about $7 million on services they need to buy). system development and maintenance. During the first two years of online reverse auction use, the • The system automatically informs registered Federal Government is estimated to have saved up suppliers by e-mail and the supplier may to $1.5 million. Besides this positive return on download the bidding documents. investment, the system enables better and more transparent procurement, as well as reducing the • The procurement officer uses a Federal Cat- bureaucratic process. For example, a normal pro- alogue to specify the description of the good curement process takes more than two months, or service required. If the item is classified as while the online reverse auction may be com- a commodity, the whole process may be car- pleted in less than 15 working days. The use of ried out through the Internet, using the online procurement has also increased the partici- price quoting system (which is a two- to pation of small businesses in government supply. three-day purchase posting site for non- So far, the system has been judged to be largely competitive small purchases). successful, bringing an estimated average 20 per cent reduction in final price for goods and services • For more substantial procurement of gen- acquired through reverse auction and price quot- eral-purpose goods and services (such as ing. In addition, suppliers are guaranteed timely building maintenance services or office sup- payments since COMPRASNET is linked to a plies and equipment), a reverse auction pro- financial payment system. cedure is used. In the reverse auction the bids (prices that the suppliers will charge for The enabler/success factors of COMPRASNET that item) are submitted on the Web. Each identified by the Brazilian Government were supplier reduces its bid price competitively political will, external pressures from citizens for with others during the auction and the one greater transparency and efficiency in government offering the lowest price at a pre-agreed end spending, and acceptance by suppliers of transpar- time for the auction will be the one awarded ency. The constraints faced have been technologi- the contract. cal, causing the occasional and temporary unavail-

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 5: E-GOVERNMENT: E-PROCUREMENT AND DEVELOPING E-BUSINESS CAPACITY 149 ability of the system, and legislative, since new The system collects (and provides) tender informa- legislation and rules were needed to allow for new tion on a national basis, so that buyers and suppli- forms of procurement. The lessons learned were: ers throughout the country can interact. Smaller (i) the need to identify the right technology, tenders, within the minimum value threshold, are namely a robust platform, scalability and a basis in transacted online and may be “open” or “closed”. open systems, with heavy investment in back A tender is considered “open” when the buyer is office sustainability; (ii) the need for intense train- able to send it to all the suppliers that have sub- ing of users on both the government and supplier scribed to the system (and also subscribed to the sides; and (iii) the need to adopt a phased particular categories that a tender may be allocated approach, since successive modules would serve as to), while a “closed” tender is made available to a system demonstrations and develop/encourage selected group of suppliers. The system also allows usage and interest. buyers to add a supplier who may not already be a subscriber to the system. These additional suppli- South Africa ers then receive by fax the information about the tender. The system keeps tender applications In 1995, the government tender board in South “unseen" until after the closing date, and is Africa decided to outsource the advertising and designed to capture all the information in a secure, processing of tenders in order to reduce the costly confidential environment and to provide the and time-consuming publishing and advertising of results of previous tenders that have been awarded small public tenders. Previously only large compa- and the pricing. Larger tenders (greater value) are nies had the time and capacity to sort through and advertised in the system but must be dealt with in comply with the many tender advertisements pub- a paper-based format (documents and applications lished in various government gazettes and local are not submitted electronically). newspapers. Automation also enabled tenders with a lower financial value to be processed and Suppliers have to pay a monthly charge in order approved more rapidly by giving junior members to gain access to the tender requests and advertised of management the authority to award the tender. information via a website. The information is categorized into various product groups according to An outsourced system provider won the tender to the standardized SIC categories. A supplier will provide an electronic purchasing system and to only receive tender opportunities that are relevant publish the purchasing requirements issued by all to its SIC category. The information on the e-pro- spheres of government, including national, procurement system in general and tenders is made vincial/state and wherever possible local/city gov- available through the Web, e-mail or fax. Subscrib- ernment organizations. The aims of the e-procure- ers may quote online using a Web-based form, by ment system were as follows: to automate the fax or by traditional physical delivery. The lessons Government’s procurement process; to achieve learned so far from the South African experience procurement transparency and accountability are the following: from an open system; to reduce procurement costs; to increase the number of government sup- On transactional capability: pliers; and to empower SMEs by ensuring that they participated in the tender process. • Regardless of the level of automation, the e- procurement system requires supervision to The stakeholders of this e-procurement system ensure that a critical mass of diverse suppli- include both buyers and suppliers. Buyers include ers can bid for tenders. the State and provincial tender boards, State departments (Agriculture, Education, Finance, • A barrier to access to the system is created Health, Housing, Public Works, Support Serv- when suppliers have to pay a fee to sub- ices), various State hospitals, regional councils and scribe. Because of this, buyers were allowed municipalities, the Navy and Army, the Police, to add specific suppliers in order to include prisons and the Post Office. Suppliers include all and target SMEs. The idea is for buyers to types of service providers, from consultants to share the costs for suppliers to subscribe. tree-felling companies, and are categorized in a • If a paying subscriber may be able to receive way similar to the tender advertisements, by e-mails, then so should a specified supplier. Standard Industry Classification (SIC) codes. A constraint was created because specified

E-COMMERCE AND DEVELOPMENT REPORT 2004 150 CHAPTER 5: E-GOVERNMENT: E-PROCUREMENT AND DEVELOPING E-BUSINESS CAPACITY

suppliers could only receive tender informa- • Tenders that are cancelled should not be tion by fax. reinstated for a specified period of time, so as to avoid undermining the "closed bid" • Usability should be enhanced (for example, principle. allowing inputs in different grammatical characters). • Tenders should be traceable to the people who are responsible for awarding them. • Making use of technology does not necessarily make the tendering process more accessi- The system has been able to partially realize the ble. The system still requires a good tender- benefits initially envisaged. It has reduced adminis- ing practice – for example, if the details or tration costs through automation and has description of an online tender are not increased transparency and accountability. It has included, the supplier must still use various been adopted by approximately 1,500 government traditional ways to ascertain the nature of organizations and has become a learning opportu- the tender; this is inefficient and can be frus- nity in those organizations. There are still delays trating to the supplier. caused by postal systems, by the need to recapture data and by the process of creating, recording and On the process of posting and responding to storing paper documents. Some steps involving tenders: the physical interaction of stakeholders (waiting in line, going to multiple offices) still have to be • The system for receiving bids needs to be overcome. improved, namely by expanding the possibilities of delivery (for example, by providing several fax numbers or establishing D. Conclusion longer deadlines).

• Guarantees should be given regarding the There appears to be no doubt as to the benefits of security, reliability and scalability of Web- at least a basic adoption of e-government for all based forms (and other technology func- countries insofar as it strengthens the relationship tionalities). between government and an increasing number of • The use of postal systems and fax machines citizens. E-procurement, as an application at a to obtain copies of tender information cre- higher level of e-government (the transactional ates delays in the tender award process. phase), has already brought benefits to public pro- Therefore, the submission and reception of curement in several countries through cost sav- tender proposals by electronic means should ings, streamlining and increased transparency. be increasingly promoted. However, in order to elucidate the suitability of any e-procurement strategies for developing coun- • Suppliers are frustrated by having to re- tries, developing countries may need to consider enter information at different points in the more than the efficiency benefits, carefully evalu- process. ating the level of public and private sector e-readiness and the relevance of partial or fully integrated • Regular reporting and feedback from suppli- e-procurement to their own e-government and ers should be monitored to ensure that the business development strategies. The potential of outsourced system provider is providing e-procurement as an enabler or promoter of e- adequate service. commerce in the economy might be an incentive. • The system requires close monitoring to ensure that suppliers use it as a tender-ena- On the one hand, it can be argued that there is lit- bling tool rather than as a technology; that tle point in proposing e-procurement in countries is, wherever possible, all the tender informa- where only certain suppliers will be in a position tion – and at a minimum – the tender to take advantage of it, and where for a variety of description must be included in the details. reasons (size, ability to fulfil orders, management capabilities) SMEs will still be excluded from the On transparency: public procurement market (offline and online). On the other hand, it can be argued that e-pro- • Suppliers must be informed of the outcome curement can lead to the development of ICT and of a tender process. transactional capabilities in government that can

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 5: E-GOVERNMENT: E-PROCUREMENT AND DEVELOPING E-BUSINESS CAPACITY 151 be applied to other activities such as receipt of have immediate use for e-procurement, enlisting payment of taxes and duties or disbursement of their support and addressing the concerns of gov- grants and social benefits, as well as in the business ernment workers whose role might change as a community competing to participate in govern- result of innovation. This is applicable to any e- ment tenders. Transitional measures can be government project. adopted so that local suppliers that initially may not be able to access e-procurement systems are In order to ensure sustainability, it should be rec- not excluded. More research into benchmarking ognized that return on investment would be public e-procurement in developing countries still achieved over time in terms of cost savings and needs to be done. increased revenue. In the context of their e-government strategies and regardless of transactional In any case, it is necessary that Governments plan- capabilities, developing countries that have not ning to adopt e-procurement carefully guide their already explored e-procurement could envisage plan through the phases outlined in section C, the enhancement of G2B interaction by posting sub-heading 1, of this chapter. Developing coun- tender information and forms online, and promot- tries should bear in mind that the adoption of e- ing awareness within the business community and procurement can be a scalable process that will the registration of potential suppliers. A portal for limit the waste of limited resources and will allow transactional services can be a longer-term goal users to gradually build up the relevant capabili- that will result from a general process reform that ties. To maximize initial adoption, the World will entail consolidating, streamlining and enhanc- Bank (2002) proposes that e-procurement plans ing the transparency of public procurement and begin by targeting agencies and suppliers that will related government processes.

E-COMMERCE AND DEVELOPMENT REPORT 2004 152 CHAPTER 5: E-GOVERNMENT: E-PROCUREMENT AND DEVELOPING E-BUSINESS CAPACITY

ANNEX I

The following are the six main global companies that provide e-procurement platforms, selected according to market share and revenue (Forrester, 2004). The companies are listed in alphabetical order.

• Ariba. Ariba was founded in 1996, is regarded as one of the largest vendors in the e-procurement market and states that it has 30 per cent of the Fortune and Global 100 companies as its customers. The Ariba Buyer application is able to deal with complicated processes, including complex approval processes, order aggregation and supplier communication needs for purchasing indirect materials. It is also able to deal with large implementations that require linkages to back end enterprise resource planning systems. See www.ariba.com.

• Clarus. Clarus was founded in 1992 and through various acquisitions entered the e-procurement market. It aims its products at the mid-market. It currently has approximately 70 customers using its e-procurement product around the world. Clarus Auctions, Clarus e-Procurement and Clarus Settlement are products that focus on a particular component of the e-procurement process. The applications are regarded as having strong sourcing and payment settlement features. See www.clar- uscorp.com.

• Commerce One. Commerce One has more than 500 customers using its e-procurement application. It also has vendor partnerships with four large systems integrators, namely Accenture, Cap Gemini Ernst and Young, Pricewaterhouse Coopers and Compaq. Commerce One Buy and Commerce One Source do not offer advanced procurement features such as complex pricing and order aggregation but are well positioned to satisfy the demands of budget-conscious firms that want to automate the whole procurement process from sources to payments. See www.commerceone.com.

• i2 RightWorks. The company has approximately 55 customers using its e-procurement application and at least four partnerships with leading system integrators. The i2 RightWorks application is best suited to firms already using i2 technology. The product is regarded as a good fit for firms that are looking to automate their indirect procurement processes now and their direct procurement processes in the future. Further testing by Forrester has shown that the product has strong workflow and purchase order processing capabilities which are beneficial for firms that want to automate and centralize complicated purchasing processes. See www.i2.com.

• iPlanet. The company has financial backing from Sun Microsystems and AOL Time Warner. In 2000 iPlanet’s E-Commerce Solutions, a Sun/Netscape Alliance, unveiled the industry's first complete business-to-business commerce platform. This included buying, selling, billing, market-making and trade facilitation software. The iPlanet BuyerXpert application is regarded as a leading application for firms that wish to automate basic purchasing processes for indirect goods for a large number of users. The application also offers self-service requisitioning and pricing capabilities and integrates with other iPlanet applications for basic sourcing capability. See wwws.sun.com/software/.

• MRO. The vendor has more than 5,000 customers and is actively seeking partnerships with key systems integrators such as IBM and AT Kearney. It also has an established partnership with i2, which is regarded as one of the leading e-procurement vendors. Its MAXIMO Buyer Solution is targeted at firms with specific industrial procurement needs. Testing by Forrester showed that the product has strong order-processing capabilities such as importing and aggregating orders from enterprise resource planning systems. See www.mro.com.

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 5: E-GOVERNMENT: E-PROCUREMENT AND DEVELOPING E-BUSINESS CAPACITY 153

References

Accenture (2003). E-government leadership: Realising the vision, Government Executive Series. http://www.accenture.com/ Australian Government Information Management Office (2000). Checklist for developing an e-procurement strategy, Version 1.0. http://www.agimo.gov.au/publications/2000/04/checklist/ Buy IT (2002a). Building the business case for e-procurement/ROI. Buy IT Best Practice Network. http://www.buyitnet.org/Best_Practice_Guidelines/e-procurement/eproc_biz_case.jsp Buy IT (2002b). Measuring the benefits: What to measure and how to measure it. Buy IT Best Practice Network. http://www.buyitnet.org/Best_Practice_Guidelines/e-Procurement/metric.jsp Deloitte Research (2002). At the dawn of e-government, a global public sector study by Deloitte Consulting and Deloitte & Touche. http://www.deloitte.com/ Dravis P (2003). Open source software: Perspectives for development. An InfoDev study. http://www.infodev.org/ symp2003/publications/OpenSourceSoftware.pdf European Commission (2004). A report on the functioning of public procurement markets in the EU: Benefits from the application of EU directives and challenges for the future. http://europa.eu.int/comm/internal_market/ public procurement/docs/public-proc-market-final-report_en.pdf Finland Government (2003). Public services in the new millennium: Programme of action to promote online government. See http://www.infosoc.fi/PublicServices.pdf Forrester (2004). The tech rankings market view: E-procurement applications. http://www.forrester.com/ I-Ways (2002). E-government for developing countries: Digest of electronic policy and regulation. New South Wales Government (2002). Electronic tendering: Sydney Water case study. Electronic procurement implementation strategy. http://www.construction.nsw.gov.au New York State Office for Technology (2001). A government without walls: Statewide plan for implementing e- commerce/e-government in New York State. http://www.oft.state.ny.us/ecommerce/quarterly/quarterly june01.htm Organization for Economic Co-operation and Development (OECD) (2002). The size of government procurement markets, a study by the OECD Trade Directorate. http://www.oecd.org/dataoecd/34/14/1845927.pdf Oliveira LMS and Amorim PP (2001). Public e-procurement, in Henriksen et al., Public E-procurement Adoption: Eco- nomic and Political Rationality. Proceedings of the 37th Hawaii International Conference on System Sciences. (C) IEEE. http://csdl.computer.org/comp/proceedings/hicss/2004/2056/05/205650124c.pdf Ozorio de Almeida M (2002). E-government for development: Success/failure case study No.12. E-procurement by Brazil's Federal Government. http://www.egov4dev.org/brazeproc.htm Pascual PJ (2003). E-Government (part of the e-primers series). e-ASEAN Task Force (UNDP-APDIP). http:// www.eprimers.org/egov/index.asp Steinberg R (2003). Strategies for successful government e-procurement, Gartner: Research Note. http://www4.gartner.com/ UNCTAD (2001). E-Commerce and Development Report. http://www.unctad.org/en/docs//ecdr01.en.pdf UNCTAD (2003). E-Commerce and Development Report. http://www.unctad.org/en/docs//ecdr2003_en.pdf United Nations Division for Public Economics and Public Administration (UNDPEPA) (2002). Benchmarking e- government a global perspective: Assessing the progress of UN member states. http://www.unpan.org/e-government/Benchmarking%20E-gov%202001.pdf United Nations Online Network in Public Administration and Finance (UNPAN) (2004). Global survey of e-government. http://www.unpan.org/egovernment2.asp West DM (2003). Global e-government (3rd study). Center for Public Policy, Brown University. http:// www.brown.edu/Administration/News_Bureau/2003-04/03-032.html#Countries and http://www.insidepoli- tics.org/egovt03int.html World Bank. 2002. The e-government handbook for developing countries, a project of InfoDev and the Center for Democracy and Technology. http://www1.worldbank.org/publicsector/egov/E-Gov%20Handbook.pdf

E-COMMERCE AND DEVELOPMENT REPORT 2004 154 CHAPTER 5: E-GOVERNMENT: E-PROCUREMENT AND DEVELOPING E-BUSINESS CAPACITY

Notes

11. See http://www.wsis.org/.

12. The chart does not include Timor Leste, which was not a UN member State in 2001.

13. An existing system, usually a computer system, that must be accommodated in building new systems. 14. See www.asycuda.org.

15. See http://www.innovazione.gov.it/ita/comunicati/2003_05_07.shtml and http://www.acquistinretepa.it/.

16. See http://www.ogc.gov.uk/. UK Office of Government Commerce, “Government announces success in search for common IT language”, 3 February 2004.

17. See http://www.manchester.gov.uk/index.htm.

18. See http://www.procurementservice.net/.

19. See Pascual (2003) and http://home.eperolehan.com.my/. 10. A restricted network used internally by an organization. It uses the same concepts and technologies of the World Wide Web, such as web browsers and servers running on Internet protocol.

11. Adapted from the Australian Government Information Management Office (2000).

12. For these reasons, the European Commission will present in 2004 an action plan for the introduction of coordinated e-procurement in the EU aimed at reducing procurement costs and contributing to further integration in European public procurement markets and to the improvement of their performance. 13. Ozorio de Almeida (2002). See also http://www.comprasnet.gov.br and http://www.is.cityu.edu.hk/research/ ejisdc/vol9/v9r6.pdf.

E-COMMERCE AND DEVELOPMENT REPORT 2004 Chapter 6 Protecting Privacy Rights in an Online World

A. Personal data in the many categories of public information, managing information economy personal data also involves important issues of privacy and the related need to strike a balance between privacy and the various needs to transmit 1. Introduction personal data. The transmission of such data is fundamental for the conduct of e-business, but it Post-industrial economies, where information is a needs a great deal of trust and confidence. With key asset, are also known as “information econo- the growth of computing, the expanded use of the mies”. An important asset of the information Internet and the extensive use of other technolo- economy is personal data, primarily in the form of gies which facilitate the creation of data trails, pri- data about customers and potential customers. vacy threats or at least the fear of them have sub- Indeed, during the dot.com boom, much of the stantially increased. Therefore, some form of legal value ascribed by stock markets to companies was protection of privacy is important for generating based on the personal data they held, that is mil- trust in e-commerce. lions of registered users (read future customers), rather than on the products and services they had Various laws govern the processing of personal sold. data, including those relating to intellectual property and consumer protection, and, most obvi- In information economies the task of protecting ously, laws protecting privacy. Different jurisdic- data is of paramount importance. While secure tions adopt various approaches to the problem of storage and transparent use are important for data protection, and this poses problems of har-

Box 6.1 The need for laws protecting personal data

A recent example of this is the case of India. India has been extremely successful in developing an outsourcing industry, from basic data entry processing to more sophisticated services such as customer call centres and financial services, based on a literate workforce and a developed computer and communications infrastructure.i Indian businesses have attracted a wide range of Western companies, from financial services to utilities, to relocate various business processes to the sub-continent. However, concerns have recently been voiced in the European Parliament about the vulnerability of personal data being transferred under such outsourcing arrangements.ii Some view outsourcing as a process that effectively circumvents European regulatory safeguards. As a consequence, the Indian National Association of Software and Service Companies has recently been pressuring the Indian Government to take regulatory action to help forestall any reaction from Europe.iii Another example can be found in Kenyan practice. Ms. Mugure Mugo, the founder of PrecissPatrol, a Kenyan outsourcing enterprise dealing with IT services, has already received requests from European-based clients specifically wanting to know the enterprise’s policy on the collection and security of collected data.iv She recognizes that the fact that Kenya does not have specific data protection laws may constitute a barrier to the development of the country’s e-business.

i See further chapter 5, “Business process outsourcing services for economic development”, pp. 135-152, in UNCTAD (2003). ii Bennet M (2004a). iii Bennet M (2004b). iv UNCTAD 2003., p. 143 et seq...

155 156 CHAPTER 6: PROTECTING PRIVACY RIGHTS IN AN ONLINE WORLD monization, especially in the case of transborder potential tensions between security and privacy flows of data. Privacy laws governing the process- needs is illustrated by the recent dispute between ing of personal data are particularly comprehen- the United States and the European Union about sive in Europe. In European jurisdictions it is for- the disclosure of passenger data by European air- bidden to transfer data to a jurisdiction that does lines to US law enforcement agencies.2 not provide adequate protection. The “adequacy provision” could affect countries that do not pro- A right to privacy is generally enshrined in vide such protection in their business with Euro- national legal systems at the constitutional level, pean countries. although there is increasing recognition that a more rigorous and detailed legal framework is Developing countries that want to participate in often required. The Justice Ministers of the mem- the information economy, and thus facilitate the ber States of the Commonwealth, for example, free flow of information from developed to devel- recently adopted a Model Privacy Law to assist oping countries, have therefore to consider the individual members in establishing such a frame- need for laws protecting personal data. work.3

This chapter is divided into six sections. Section A Legal recognition of the importance of privacy puts the question of data protection in context. extends beyond human rights conventions and Section B defines the various categories of per- constitutional protections. Under the WTO- sonal data. Section C presents the privacy princi- administered General Agreement on Trade in ples, the basis for data protection regulation. Sec- Services, for example, the general obligation to tion D deals with the regulatory approaches taken remove measures that discriminate against or by the various jurisdictions, explaining why each restrict trade in service is subject to certain general jurisdiction has chosen a specific approach and the exceptions, which include "the protection of the consequences of such a choice. Section E considers privacy of individuals in relation to the processing the question of transborder transfers of data, high- and dissemination of personal data".4 lighting the interest of developing countries, and section F presents the results of a questionnaire on data protection legislation and offers some policy 3. Technological progress and data recommendations for developing countries. protection

2. Privacy of personal data as a While privacy has always been a concern, with the fundamental human right growth of computing in the 1960s and 1970s, there was widespread anxiety that the capabilities As stated in the Universal Declaration of Human of computers with regard to the processing of Rights, privacy is a fundamental human right. information would engender a new threat to Respect for privacy is viewed as a prerequisite to privacy, as noted by a report commissioned by the enable citizens to fully develop as individuals as UK Government in 1975: well as to participate in society, although what is “The speed of computers, their capacity to considered to constitute the concept of privacy store, combine, retrieve and transfer data, and its boundaries may differ widely between cul- their flexibility, and the low unit cost of the tures and societies. For some, the threat of inter- work which they can do have the following ference is perceived to lie primarily in government practical implications for privacy: and public administration. For others, the private sector is seen as an eqtual or even greater threat, as (1) they facilitate the maintenance of exten- customer data have become an increasingly valua- sive record systems and the retention of data ble asset. on those systems;

Privacy as a right must coexist with and be bal- (2) they can make data easily and quickly anced against other individual rights, such as the accessible from many distant points; right of expression (Article 19 of the Universal Declaration), which is the basis for free media as (3) they make it possible for data to be trans- well as with broader societal concerns, such as the ferred quickly from one information system threat to national security from terrorism.1 The to another;

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 6: PROTECTING PRIVACY RIGHTS IN AN ONLINE WORLD 157

Box 6.2 Article 12 of the Universal Declaration of Human Rights

“No one shall be subjected to arbitrary interference with his privacy, family, home or correspondence, nor to attacks upon his honour and reputation. Everyone has the right to the protection of the law against such interference or attacks”

(4) they make it possible for data to be com- ters, personal data that relate to our lives as citi- bined in ways which might not otherwise be zens. For example, eligible voters in an area are practicable”5 traditionally listed in registers available for inspection from public offices. This information is now In response to these perceived threats, Govern- available on CD-ROM or the Internet. As a result, ments and international organizations began to there has been a huge surge in demand for it from consider the need for a regulatory regime tailored marketing companies, which regard “public” per- specifically to address computer-derived threats to sonal data as a valuable resource. In such situa- privacy. Within Europe, such regulation became tions, the Internet is basically a new medium known as “data protection” legislation. Data pro- within which personal data can be used and tection laws do not map neatly onto a privacy abused. The nature of the Internet facilitates the framework, but rather represent a range of differ- unfettered transmission of data around the world, ing interests. A broad distinction has to be made with the potential to circumvent national regula- between “interests that relate to the quality of tions. In this respect, the concerns expressed with (personal) information and information systems”, regard to the Internet echo those expressed in the such as accessibility and reliability, and “interests early days of computing. pertaining to the condition of persons as data subjects6 and to the quality of society generally”, The second category of threat concerns the ability such as privacy, autonomy and democracy.7 As a to obtain personal data arising from the online consequence of this broad range of interests, data activities of data subjects when using an Internet- protection laws cannot be seen as simply a subset based service, such as e-mail,8 the Web, Usenet or of privacy law, but rather as a distinct but overlap- P2P applications. One aspect of this threat stems ping topic, also addressing data security issues. from the current insecurity of the Internet as a communications mechanism. Data subjects are More recently, as individuals, businesses, organiza- generally not fully aware of the risks associated tions and public authorities carry out an ever with disclosing personal information over the wider range of activities across the Internet, con- Internet. A second component relates to personal cern has again arisen about the potential threats to data arising from the monitoring of a data sub- privacy from this online environment. This con- ject's Internet transmissions and connections, such cern relates to personal data being made available as the websites visited and hypertext links fol- on the Internet, and the monitoring of an individ- lowed. The collection of such information, partic- ual's Internet-based activities. ularly over time, can enable a detailed profile of an individual's preferences to be constructed. In the first scenario, whether or not an individual uses the Internet, data collected from him/her In addition to the Internet, other technologies may subsequently and increasingly be processed have a potential to pose privacy threats. For exam- and made available on the Internet. A national tel- ple, mobile phones and fixed lines may allow the ephone directory, for example, once placed on a identification and the location of the person who server connected to the Internet becomes available is calling. An Australian writer who has exten- to the world, thus resulting in potential exposure sively written on new technologies identified as of a qualitatively different nature from that arising PITs (privacy-invasive technologies) calls this from the publication of the traditional physical trend data-trail intensification (through identified directory. This qualitative shift can also be seen in phones, stored-value cards and intelligent trans- respect of personal data contained in public regis- portation systems).9

E-COMMERCE AND DEVELOPMENT REPORT 2004 158 CHAPTER 6: PROTECTING PRIVACY RIGHTS IN AN ONLINE WORLD

With the expanded and extensive use of comput- 2. Consensual data ing, the Internet and other technologies, the fear of privacy threats has substantially increased. Consensual data are data that are obtained directly According to a Wall Street Journal/NBC poll, 29 from an individual, with the individual's knowl- per cent of Americans ranked the loss of privacy edge as to why it is being collected, and by whom, as their primary concern for the 21st century.10 and with the individual's consent for its use, According to the study entitled “The new e-gov- whether express or implied. For these to be truly ernment equation: Ease, engagement, privacy and "consensual data" the consent itself should be spe- protection”, conducted by Hart-Teeter Research, cific to the purpose provided, freely given and more than 60 per cent of Americans who use the informed. Often, individuals provide these data Internet are interested in using e-government, but when performing tasks such as filling out an appli- they express concern that dealing with govern- cation form, subscribing to a service or entering ment over the Internet may compromise their pri- into a contract. They are data that an individual vacy.11 To react to these perceived fears, there is a allows to be collected and used for certain speci- strong need to build trust and confidence. Leaving fied purposes. In some instances, consent is aside the technological ways to do so, through implied from the fact that the individual has pro- data security mechanisms such as encryption, this vided the data in order to enter into or fulfil a con- chapter will focus on the legal ways to protect pri- tract after having been informed accordingly. vacy, thus generating trust in e-business. Under other circumstances, the data subject's consent can be implied from the fact that the person giving such consent has not objected to any pur- B. Categories of personal data pose or further transfer after having been informed of them and given the opportunity to object to the processing. This implied consent pro- 1. Definition cedure is termed an "opt-out" procedure. Under an "opt-out" procedure, the data may be used for Before analysing the information privacy princi- the purposes specified, unless the individual indi- ples, which constitute the point of departure for cates that he/she does not agree with this. How- data protection regulation, it is important to gain ever, implied consent may not be appropriate in an understanding of what such principles are many circumstances, and explicit consent should designed to protect -in other words, what is con- be obtained. One clear circumstance is where the sidered to be “personal data”. data are of a sensitive nature, a category of personal data that is addressed below. Here the data The concept of personal data is very broad and dif- should be obtained via an "opt-in". Under an "opt- ficult to pinpoint. Personal data encompass any in" procedure, the data may be used for the rea- and all data that relate to an individual and that sons given only where the individual affirmatively could be used, either directly or indirectly, to indicates this is acceptable. This is the standard for identify him or her. This includes information consent to use of sensitive data in many countries, such as a name and birth date, which would per- notably the European Union (EU) member States. mit direct identification of an individual, but may also include information such as a telephone 3. Non-consensual data number or a job title, which could be used, indi- 12 rectly, to identify an individual. In some juris- Non-consensual data are data obtained without dictions, protection is extended to legal persons, the knowledge or consent of the individual. These such as companies and trade unions, as well as data may be consensual data reorganized accord- individual natural persons. ing to certain criteria, such as geographical location, gender or income level, and then sold in the The types of personal data collected can be form of marketing lists to various companies or grouped into three general categories: consensual, organizations. Non-consensual data may also be non-consensual and sensitive data. These catego- data collected as part of a transaction, such as what ries are outlined and explained below. It should be items were bought or what service was ordered, noted that while only certain data will constitute the price range of the items or service, the styles sensitive data, virtually all data can be categorized or options, and any other data that may be part of as either consensual or non-consensual data. the transaction. Non-consensual data are often

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 6: PROTECTING PRIVACY RIGHTS IN AN ONLINE WORLD 159 combined with data from various sources to com- gather information on visitors to a website or on pile a more complete profile of the data subject. the individual(s) who read the e-mail. Web bugs are generally invisible, as they are added to web A consumer may consent to the collection of per- pages as part of the elements of the site and are sonal data for specific purposes, and yet considera- usually only 1 pixel-by-1 pixel in size. Spyware is ble amounts of valuable data may be collected generally software that is automatically installed through the transaction process. For example, on an individual's computer system. It is usually data about the style of clothing bought, the col- designed to collect information without the user's ours, sizes, brands, general price range of each knowledge and permission and, if so configured, item, and payment method are all collected as part to forward the information about software being of the transaction. These data is collected without used and the browsing and purchasing habits of the express consent and perhaps without the the user to a specified data collection facility. knowledge of the consumer, and allow the online retailer to create a marketing profile of the consumer. This profile can then be used in-house, or 4. Sensitive data sold to marketing agencies or manufacturers. Sensitive data are data considered by policy mak- Trace data are unique to the online environment. ers and legislators to reveal fundamental aspects of Although non-consensual data, they are usually our private lives, and therefore require a higher obtained directly from the individual but without level of protection to prevent privacy infringe- the individual's knowledge. Trace data are data ments. This may include requirements for data that are obtained by tracking an individual's use controllers13 to obtain explicit rather than implied of Internet-based services. The data, depending on consent, enhance the security measures imple- how they are collected, may include information mented and further limit the types of processing on what websites were visited, which pages were that may be carried out. Such enhanced protection viewed and how long an individual spent on a cer- is deemed necessary because discriminatory use of tain page of a website. The data collected will the data could substantially infringe an individ- include information such as the IP address the ual's privacy. consumer is using, the programs his/her computer is running, other sites visited, hypertext links What is considered “sensitive” may obviously clicked on, the computer's time zone, and possi- vary significantly between jurisdictions, reflecting bly the e-mail address of the person using the different cultures. In the United Nations' “Guide- computer. lines for the Regulation of Computerized Personal Data Files”, for example, Principle 5 prohibits the Trace data are often collected through the use of processing of certain types of data: "data likely to “cookies”, which are unique identifiers that web give rise to unlawful or arbitrary discrimination, servers will place on an individual's computer. In including information on racial and ethnic origin, essence, a cookie is a serial number for a compu- colour, sex life, political opinions, religious, philo- ter that allows the web server to retrieve records sophical and other beliefs as well as membership regarding that computer from the web server's of an association or trade union, should not be databases. Cookies will often be used by a web- compiled".14 site to recognize a certain computer or user, allowing automatic log-in, or to facilitate a faster Under European Union law, personal data used in consumer transaction by identifying the user and particular contexts have also been subject to spe- automatically charging a purchase to the con- cial regulatory treatment. In the telecommunica- sumer's credit card information already on file tions sector, for example, data relating to an indi- with the website, such as Amazon's “1-Click” vidual's use of telecommunication services (e.g. transaction service. However, trace data may also number called, call duration and location data) are be collected through the use of other technolo- considered to pose increased risks to an individ- gies called “web bugs” and “spyware”. Like cook- ual's privacy and are therefore subject to addi- ies, these data-gathering tools operate in the back- tional legal protections. In the United States, ground, without the user's explicit knowledge. A financial data and data relating to a person's choice web bug is a graphic placed on a web page, or of video rental are considered sensitive enough to even in an e-mail message, that is designed to merit specific legislative protection.

E-COMMERCE AND DEVELOPMENT REPORT 2004 160 CHAPTER 6: PROTECTING PRIVACY RIGHTS IN AN ONLINE WORLD

C. Principles of good practice 1. Collection

Collection of personal data should be done fairly There has been significant activity at an interna- and lawfully. Fair collection means that an indi- tional level towards the recognition of a set of vidual should be informed, at the moment of col- international data protection principles. In the lection, of the contemplated uses of that data (see early 1980s, the Council of Europe and the Organ- also the transparency principle below). The law- isation for Economic Co-operation and Develop- fulness of data collection may be specified in dif- ment (OECD) adopted a number of measures, and ferent ways. Some jurisdictions, generally com- the United Nations followed in 1990 with “Guide- mon-law-based, state that the collection of data is lines for the Regulation of Computerized Personal 15 lawful provided that it is not in breach of any Data Files”. existing legal obligation governing the use of those data (e.g. confidential information). Other Since most of the data protection regulation has jurisdictions, generally civil law, restrict the con- been developed around the same fair information cept of lawful collection further by stating that practices (or privacy principles), a description of collection is only lawful where the data subject such regulation should be preceded by an analysis has given his/her consent or some other specified of those principles. They set limits to processing, and limited criteria are met (e.g. the collection is that is the performance of such operations as col- necessary in order to perform a contract on lection, handling, use and transfer of personal data behalf of the data subject). Consent is not gener- that can be done manually as well as electroni- ally considered meaningful unless it is freely cally, although electronic processing is generally given and the individual has been given adequate perceived as presenting the greater risk to privacy. information about the nature of the processing The principles also address the transfer of personal activity, such as the purposes for which the infor- data to parties in places that do not have similar mation will be used, to whom it may be disclosed protection. and any consequences that may result from with- The privacy principles are present in the interna- holding information or permission to use. tional instruments mentioned above as well as in relevant national legislation. They have also been 2. Proportionality adopted by the private sector in self-regulatory initiatives (see further below). Thus, despite the legal The collection of personal data should be limited meaning they may assume according to the spe- to data that are adequate and relevant for the 16 cific instruments in which they are enshrined, specified purpose or purposes. Since computers one may consider their uniform repetition as evi- can hold vast amounts of data easily and rela- dence of diuturnitas (the practice of States), one of tively cheaply, there may be a tendency to collect the basic features of general international law, the excessive information from, or about, a data sub- other being opinio iuris ac necessitatis (acts must ject without a specific need. In addition, such occur out of a sense of obligation). If the second data should be retained only for the minimum element is also present, the principles would then period of time needed to accomplish the pur- be binding on all States, regardless of their inclu- pose(s) for which the data are collected.17 Data sion in national laws. destruction procedures may be as important for the protection of an individual’s privacy interests The advantage of a principles-based approach to as the process of data collection and retention. the regulation of data protection is the avoidance For instance, billing data should in principle be of technological redundancy. The principles retained only for the period during which the bill should therefore be as applicable to the Internet as may be challenged or the payment pursued. they were to the introduction of computer technology, in other words they should be technologically neutral. It is the mechanisms by which such 3. Use principles are complied with that obviously change in response to the new threats and oppor- There should be no disclosure, transfer or other tunities created by the changing technological use except those needed to achieve the purposes environment. These principles of good practice specified when the data were collected. Obvious are set out below. exceptions to this principle may be where the

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 6: PROTECTING PRIVACY RIGHTS IN AN ONLINE WORLD 161 secondary use is required by law or for some 8. Transfers/disclosure other public interest, such as the investigation and detection of crime. Personal data should be Personal data should not be transferred to third used only in a manner consistent with expecta- parties unless the individual was informed that tions. Individuals provide data, or allow data to such disclosure may take place and provided that be collected, for a certain specific purpose. Data it can be ensured that the data will be given the should be used only for that purpose, and should same level of protection by the recipient as was be further used or communicated only if this is provided by the sender. This is particularly an necessary in order to accomplish the original issue where data are transferred between jurisdic- 18 purpose. tions that have different legal frameworks.

4. Quality 9. Security

Personal data that are collected and stored should Appropriate security measures should be imple- be accurate and reviewed periodically to ensure mented to protect against risks presented by the that they are kept accurate and up to date. This collection, use and storage of an individual's per- principle is an example of where the privacy inter- sonal data, whether from accidental loss, damage ests of the individual should overlap with those of or disclosure or deliberate interference. This may the entity, whether public or private sector, which require the use of organizational measures, such as is processing the data. the appropriate screening and training of employees; technological measures, such as encryption and access controls; and physical measures, such as 5. Transparency preventing computers from being stolen. The appropriateness of the security measures applied In line with the concept of “fair” collection noted will depend on the nature of the data concerned above, individuals should be informed of the pur- (e.g. sensitive data), the purposes for which they pose(s) for collecting data, who will be using the are being used, the availability of the protection data, who is in charge of protecting those data, mechanisms and their cost, relative to the risks and, if applicable, any contemplated transfers of involved. the data and to whom. 10. Accountability 6. Access and correction Data controller compliance should be ensured Individuals should have the right to inquire through a system of enforcement, which includes whether their personal data are being used and the ability of a data subject to seek redress for the right to obtain a copy of all personal data col- breach of the principles in the processing of his or lected and maintained that relate to them. There her personal data. The implementation of substan- will be certain exemptions to the granting of such tive rules controlling the ways in which personal access, for example where the information would information can be collected, processed and dis- also reveal personal information provided by closed is obviously insufficient in and of itself. another party, whose privacy interests also need There is also a need for a procedural framework to be considered. Individuals should also be given that ensures that such rules are complied with and the right to have inaccurate data corrected.19 that remedies are available for non-compliance.

7. Objection D. Regulatory approaches

Individuals should have the right to object to the processing of the personal data relating to The German State of Hesse enacted the first law them in certain situations, such as where serious directed specifically at the protection of personal damage or distress results, or for specified pur- data in 1970. Laws in Sweden and the United poses, such as use for direct marketing activi- States followed soon after. Throughout the rest of ties. the 1970s most developed nations followed suit,

E-COMMERCE AND DEVELOPMENT REPORT 2004 162 CHAPTER 6: PROTECTING PRIVACY RIGHTS IN AN ONLINE WORLD enacting some form of privacy or data protection States are obliged to implement through the adop- legislation themselves. However, by the late 1970s tion of national legislation reflecting the Conven- the differences in the provisions of these various tion's provisions. Moreover, the means by which national laws had created the threat of obstacles to the provisions are given effect in national law vary the free flow of information between countries, from State to State. potentially stifling economic growth. To create more coherent and uniform laws, intergovern- The United Nations adopted a measure addressing mental organizations such as the OECD and the the human rights aspects of the use of computer Council of Europe outlined common data protec- technology some ten years after the OECD and tion principles to be followed by member States. Council of Europe. In 1990, the General Assem- The principles outlined by those two organiza- bly adopted a set of “Guidelines for the Regula- tions are the foundation for most national legislation of Computerized Personal Data Files”.22 tion in place today. These Guidelines are divided into two sections. The first section covers "Principles concerning the 1. Approaches taken by international minimum guarantees that should be provided in organizations national legislations". These principles echo those put forward by both the Council of Europe Con- vention and the OECD Guidelines. The second In 1980 the OECD concluded a study that culmi- section considers the “Application of the Guide- nated in the creation of the OECD Council Rec- lines to personal data files kept by governmental ommendation Concerning Guidelines Governing international organizations”. This requires that the Protection of Privacy and Transborder Flows 20 international organizations designate a particular of Personal Data . The Guidelines established supervisory authority to oversee their compliance. eight basic "privacy principles", which apply to In addition, it includes a “humanitarian clause”, any information relating to an identified or identi- which states that "a derogation from these princi- fiable natural person, cover both the public and ples may be specifically provided for when the private sectors, and encompass all types of data purpose of the file is the protection of human processing. rights and fundamental freedoms of the individual concerned or humanitarian assistance". The Guidelines require that member countries' data protection standards provide equivalent pro- Such a clause is intended to cover organizations tection. If a member country does not provide such as Amnesty International, which hold large equivalent protection for certain categories of amounts of personal data of prisoners, but would data, the Guidelines provide for the implementa- be wary of sending information out to a data sub- tion of legitimate restrictions on transfers of those ject on the basis of an access request made while categories of data to that member country. the person was still imprisoned.

The Council of Europe's Convention for the Pro- The UN Guidelines also provide for the principle tection of Individuals with regard to Automatic of non-discrimination, according to which sensi- Processing of Personal Data21 is similar to the tive data should not be compiled at all. The power OECD Guidelines in that the principles also to make an exception to the principles contained apply to both the public and the private sector. It in the Guidelines is severely limited and a national differs from the OECD Guidelines in that it supervisory authority should have the power to applies only to automated data processing. They impose sanctions for non-compliance. also differ in their emphasis: the Convention stresses the privacy of the individual, while the 2. Current approaches to data pro- OECD Guidelines emphasize the desire to ensure tection law the free flow of information. The OECD and Council of Europe principles Although the two organizations are in general established the fundamental principles of fair agreement as to the nature of privacy principles, information practices for the protection of per- the OECD Guidelines are non-binding in law, sonal data. However, the approaches taken by whereas the Convention is an instrument of pub- states to implement these principles into national lic international law, which signatory member legislation have developed along three different

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 6: PROTECTING PRIVACY RIGHTS IN AN ONLINE WORLD 163 lines. The conflict between these approaches is operates. The supervisor is also legally responsi- centred on methodology and scope, and not on ble for ensuring that an individual's rights are basic privacy principles. The three basic protected, and he/she should therefore be approaches developed to implement data protec- endowed with sufficient authority to act autono- tion principles are comprehensive regulation, sec- mously from the rest of the organization, since toral regulation and self-regulation/co-regulation. the controller is directly accountable to the national oversight body, not to the organization Comprehensive or omnibus regulation for which he/she works.

A comprehensive regulatory approach essentially Until recently South American countries gener- builds on the Council of Europe model of omni- ally did not have legislation regulating data protec- bus or universal protection. This approach tion, but now a number of countries from the requires the creation of a general law promoting region have been re-evaluating their legislative fair information practices. In addition to laying regimes as they pertain to the protection of per- out rules establishing the parameters for collec- sonal data, partly because of the EU Data Protec- tion, use and dissemination of personal data in tion Directive. As a result, some South American both the public and private sectors, the law must countries follow the comprehensive approach. On provide individuals with the right to receive con- 11 November 2003 a judge in Buenos Aires issued firmation as to what data, if any, are maintained the first injunction under the Argentine data pro- about them and the right to have those data recti- tection law.24 fied if they are incorrect or incomplete. The most important aspect of the comprehensive approach, Because of the nature of the comprehensive from the individual/consumer's perspective, is the approach, the transfer of personal data to coun- requirement that prior to the collection or use of tries where the data are not provided the same any personal data, the individual must be notified level, or an adequate level, of protection is proof what data will be collected and how they will hibited. This is to prevent circumvention of the be used. Consent for that processing must usually law through the use of a third-party country, and be obtained. The goal is to give individuals greater to protect the rights of the individual in their control over their personal data. This is the personal data. For data to be transferred to a approach taken by the European Union in Direc- country with less than adequate protection, the tive No. 95/46/EC of 24 October 1995 on the individual must consent to the transfer or Protection of Individuals with regard to the arrangements must be made, either via contract Processing of Personal Data and on the Free or some other method, to ensure that the data Movement of Such Data, otherwise known as the will receive the requisite protection (see further Data Protection Directive.23 below).

Supervision of the implementation and enforce- Sectoral regulation ment of the law on a national basis, as well as of compliance with it, is conducted by a national The sectoral approach does not opt for the use of supervisory authority or regulator. This author- all-encompassing legislation, and instead relies on ity also acts as the guarantor of individual rights localized legislation. The theory behind a sectoral and must therefore be empowered to act inde- approach is that over-regulation by the Govern- pendently of other government bodies. At a min- ment will stifle growth and innovation. The belief imum the supervising body's powers must is that markets should be allowed to self-regulate, include the powers of investigation and interven- with the Government only stepping in to provide tion, particularly in cases of complaints from protection in areas where there is a high risk of individuals, and the power to engage in legal pro- harm if data are misused, such as the financial sec- ceedings. In some countries, such as Germany, tor or in the case of data relating to health or chil- the comprehensive regulatory approach requires dren. A typical example of a country following each data controller to appoint an “in-house this approach is the United States; other countries supervisor”. The duty of this supervisor is to following this approach are Japan, Singapore and identify, monitor and analyse the purposes and Barbados. It can be argued that the sectoral practices of processing within the company, approach stands as its own model of data protec- organization or association in which he or she tion.

E-COMMERCE AND DEVELOPMENT REPORT 2004 164 CHAPTER 6: PROTECTING PRIVACY RIGHTS IN AN ONLINE WORLD

In the sectoral approach there is no national over- conduct and/or legislation, are left to individual sight agency. The general trend among countries industries and are overseen by a privacy/data pro- following this approach has been to enact legisla- tection agency. This agency ensures compliance tion in the public sector, protecting individuals with the rules and is responsible for handling com- from governmental abuse of personal data, while plaints and resolving disputes. On top of this sec- leaving the private sector relatively regulation toral approach is national legislation that is appli- free. The creation, implementation and enforce- cable across the board, providing a minimum level ment of rules, and the imposition of sanctions for of protection to all individuals in their personal violation of those rules, are left to individual sec- data. Industries that do not implement their own tors or industries. Where data protection rules are codes or rules are then subject to the standards of imposed in a sector or implemented voluntarily, this legislation. Examples of countries implement- they will usually take into account some of the ing a self-/co-regulatory approach are Australia, privacy principles outlined in the OECD Guide- New Zealand, South Africa and the Republic of lines or the Council of Europe Convention, but Korea. these rules will apply only within the specific sectors where they are enacted or to the extent that The self-/co-regulatory approach, like the omni- they are voluntarily enforced. Various companies, bus approach, typically establishes a national over- especially in the United States and Canada, have sight agency that is endowed with considerable publicly adhered to the Guidelines. Recently, Sin- power and authority. This agency may be the gapore adopted a Model Data Protection Code main oversight body for all legislation dealing establishing minimum standards for the private with privacy and/or data protection that encom- sector.25 However, the basic assumption in a sec- passes both the public and private sectors. This is toral approach is that where there is no governing unlike the sectoral approach, where some areas of legislation, regulation or code of conduct, there is legislation are governed by one national body no legal protection. while others may govern other areas.

Generally, national legislation is enacted to pro- The result of a self-/co-regulatory approach is that vide greater protection in the financial, telecom- individuals are assured that their personal data will munications and medical sectors. In addition, receive a minimum level of nationally mandated most professions, such as doctors, accountants, protection, but the standards may differ between lawyers and bankers, are bound by strong confi- industries or sectors. The differing levels of pro- dentiality practices. The failure of many organiza- tection among the various sectors and industries tions in the United States to embrace meaningful may work to restrict or complicate flows of data self-regulation led the Federal Trade Commission, from one sector or industry to another. However, the agency responsible for oversight of undertak- this approach may also permit the industry-spe- ings' compliance with stated privacy policies as a cific codes or rules to reflect its realities or particu- fair trade practice, to assert the need for more larities. This helps avoid regulation that is exces- comprehensive privacy regulation. sive or unnecessary in an industry or that just does not fit and thus would be unduly costly or act as a Self-/co-regulatory approach barrier to commerce.

The self-/co-regulatory approach can be considered a hybrid of the comprehensive and sectoral E. Transborder transfers of data approaches. Like a comprehensive approach, a self-/co-regulatory approach centres on universal legislation at a national level that provides individ- Transborder flows of data result from an expan- uals with rights in their personal information, and sion of international trade, globalization and the protects these rights by regulating collection, use emergence of the information economy, and is an and transfers of personal data. The primary differ- inevitable aspect of the use of Internet-based serv- ence between the two approaches is the manner in ices. However, such transfers may result in an which the data protection principles are imple- infringement of the privacy rights of an individ- mented. Under a self-/co-regulatory approach, ual, when data are moved from a protective creation, implementation and enforcement of data regime to a jurisdiction without such legal protec- protection regulations, including rules, codes of tions.

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 6: PROTECTING PRIVACY RIGHTS IN AN ONLINE WORLD 165

The primary goal of data protection legislation is third country, but also the procedural mecha- to protect the personal data of those who live nisms in place to ensure the effectiveness of such within the borders of that jurisdiction, which rules. This will include considerations of eco- could be compromised if data were allowed to be nomic and political stability, the viability of regu- transferred outside the country to a jurisdiction latory or judicial systems, and examination of where the protection requirements are less oner- other socio-political aspects that may result in a ous, in effect circumventing individual rights. To lack of security. Thus, the adequacy of another avoid this, countries that have data protection country's data protection rules should be deter- laws have adopted rules regulating transborder mined on the basis of the content of the rules and transfers of data. The degree of regulation will on the basis of the means and entities used to obviously vary according to the regulatory ensure their proper application. For the time approach taken. Therefore, prior to any transbor- being the EU has made findings of adequacy for der transfer of data those seeking to transfer the Argentina, Hungary, Switzerland, Canada and data must be aware of, and understand, any laws for those US organizations that have subscribed applicable to them that govern such transfers. to the “safe harbour” arrangement.26

1. Transborder transfers of data under 2. Transborder transfer of data under the comprehensive approach the sectoral approach

The comprehensive approach is generally the most restrictive with regard to transborder trans- The sectoral approach is generally the most fers of data. Owing to the protective nature of relaxed with regard to transborder transfers of the comprehensive approach, transfers are pro- data. This is due to the desire to let markets hibited unless the country or jurisdiction to adjust themselves, with little or no governmen- which the data are transferred offers what is con- tal intervention. However, in many countries sidered to be “adequate” or “equivalent” protec- sector-specific legislation or regulations have tion. In that connection, certain safeguards must been enacted to provide protection for certain be in place to ensure the continued protection of types of personal data. The sectors traditionally personal data. Exactly who will make determina- regulated are the financial sector and the health tions of adequacy may vary depending on how sector. Thus, any transfers of data regarding the comprehensive system is established. In the financial data or health data are likely to have first instance, determinations may be made by restrictions that must be complied with. The the exporting data controller, on the basis of the restrictions will generally require that notifica- specific circumstances, with the national supervi- tion of the transfer be provided, and possibly sory authority exercising regulatory oversight. that consent be obtained prior to the transfer. Alternatively, the authority may issue ex-ante The key aspect in a sectoral approach is not nec- general determinations for specific jurisdictions essarily the type of data that is being protected, or sectors of activity. but the sector where the data originated. For example, financial information may be protected Determinations of adequacy are generally based on only if it is a regulated financial services pro- the type of data being transferred and the kind of vider that collects and uses it. The same applies protections that are afforded to those data: the to health information: it must be collected and more sensitive the data, the greater the protections used by a regulated healthcare institution or required. The protections may be legal, contractual insurer under the sectoral legislation. Canada has or in some other binding form, but must be suffi- adopted this solution: its legislation contains no cient to ensure the continued protection of the explicit reference to international data transfers, transferred data. but it requires that any transfer to any third party result in continued protection under Cana- To be adequate, the protections must also be dian privacy standards. This permits parties to enforceable; data protection rules are only effec- such transfer to make protective arrangements tive if they are followed in practice. It is there- suitable to the circumstances, thus avoiding the fore necessary to consider not just the content of burdens and negative impact of overly restric- rules applicable to personal data transferred to a tive data flows.

E-COMMERCE AND DEVELOPMENT REPORT 2004 166 CHAPTER 6: PROTECTING PRIVACY RIGHTS IN AN ONLINE WORLD

3. Transborder transfer of data under tions on transfers of data from developed coun- the self-/co-regulatory approach tries. Depending on the approach adopted by the country where data are sought to be transferred The rules regarding transborder transfers of data from, there are several options for developing under the self-/co-regulatory approach are similar countries. to those under a comprehensive approach. The overarching national protection provided in this As discussed above, under a comprehensive approach establishes a level of protection for all approach the transborder transfers of personal individuals. Transborder transfers of any data of data are limited to countries providing adequate any individual must meet the standards set out by protection. There are several ways, however, in national law. This level is generally on a par with which an adequate level of protection may be pro- that of the comprehensive approach: there must vided: by the country enacting similar legislation, be an adequate level of protection. However, a through contractual measures, or through “safe self-/co-regulatory approach will often differ from harbour” arrangements. a comprehensive approach in how determinations of adequacy are made. While there is oversight on As explained above, the primary focus in a deter- a national level in a self-/co-regulatory approach, mination of adequacy is whether sufficient protec- individual sectors are generally responsible for tions are available and whether those protections adopting standards and making determinations of are enforceable. Of course, the easiest way to ver- adequacy. The result is that where a comprehen- ify this is to ascertain whether the country seeking sive approach will look at the level of sensitivity to receive data has adopted similar comprehensive of data to determine what is necessary in order for legislation. In such instances, a determination of protection to be considered adequate, a self-/co- adequacy is generally a relatively simple matter, regulatory approach may look at the sector where and once such a determination is made restrictions the data originated in order to determine ade- on transborder transfers are either abolished or 27 quacy. This is similar to a sectoral approach. For significantly minimized. example, under a self-/co-regulatory approach financial data generated by a financial institution However, for many developing countries a com- may receive greater protection than financial data prehensive legislative approach may be too restric- gathered from a voluntary survey, even though it tive and burdensome. An alternative option may may be the same data. be to enact legislation, regulations or administrative rules in a specific sector, such as the telecom- The self-/co-regulatory approach differs from the munications or financial sector, that are sufficient sectoral approach in that the data collected via the to be considered to provide adequate protection, survey are still guaranteed a level of protection allowing data to be transferred to data controllers prior to any transborder transfers. This is most within that sector. likely not the case in a sectoral approach. When enacting legislation is not feasible, transbor- 4. Issues for developing countries der transfers of data may still be facilitated on an individual basis through the use of contractual The three approaches to data protection outlined measures. Organizations that wish to receive data above are approaches traditionally taken by indus- from a country with a comprehensive approach trialized countries in an effort to protect personal can enter into a contract, which then obligates the data yet allow for the free flow of information. organization to take proper measures to ensure While data protection legislation is generally the protection of the data. The Council of Europe designed to be effective domestically, restrictions and the European Union have both adopted on transborder transfers of data can obviously model contracts designed to facilitate the transfer have a direct effect on other countries. This is par- of personal data,28 as well as various industry ticularly true in many developing countries, organizations, such as the International Chamber where legal infrastructures often offer little protec- of Commerce.29 tion, if any, for personal data. This may have a detrimental effect on many developing countries, In some instances, arrangements may be made as their domestic business such as data processing between countries with comprehensive legisla- and call centres may be limited owing to restric- tion and countries following a sectoral approach

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 6: PROTECTING PRIVACY RIGHTS IN AN ONLINE WORLD 167 to allow for transborder transfers of data. These F. Survey on data protection are termed "safe harbour" arrangements. A safe legislation harbour arrangement is designed to create a workable set of rules that organizations in a country with a sectoral approach can voluntar- To complement the analysis above, the ily adhere to, and that are recognized as provid- UNCTAD secretariat developed a questionnaire ing adequate protection by a country with a that was circulated through a note verbale to comprehensive approach.30 Essentially, this member States. Governments were invited to involves voluntary compliance with the fair complete the questionnaire and to provide information processing principles, plus an agreed UNCTAD with a copy of their national legisla- enforcement regime operated, for example, by a tion on the issue of data protection. consumer protection body (e.g. the US Federal Trade Commission). Organizations that partici- The survey asked whether the country had pate in a safe harbour arrangement are then adopted any regulation on privacy matters. Ques- placed on a publicly available list, which allows tions were designed to identify the approach cho- individuals, organizations, and other countries to sen by the country while regulating data protec- know which organizations may and may not tion. Other questions looked at the various receive data transfers. categories of data to see whether they were regulated differently (for example, computer-based The sectoral approach to data protection has tradi- records versus manual records, sensitive data ver- tionally been considered to be much friendlier to sus non sensitive data). Some questions explored developing countries. This is because such an the manner in which privacy rights were imple- approach generally offers fewer barriers to trans- mented and the possibilities given to individuals to border transfers of data. However, as more coun- access and modify their data. Finally, a specific tries adopt a comprehensive approach to data pro- question inquired about the situation regarding tection, this approach may result in the data flows commercial trade secrets. to developing countries being threatened. As discussed previously, even under the sectoral 1. Results and analysis of UNCTAD approach, there are often regulated sectors that survey may have more restrictive protective measures, typically the financial and health sectors. For Responses to the questionnaire were received from transfers from these sectors to be allowed, proper the following countries: Argentina, Belarus, Bul- measures must be taken, such as enacting similar garia, Colombia, Croatia, Czech Republic, Den- protection or entering into contractual obliga- mark, Dominican Republic, Egypt, Estonia, Fin- tions, much like under a comprehensive approach, land, Guatemala, Italy, Jordan, Latvia, Lebanon, only more limited in scope. Lithuania, Malta, Mexico, Monaco, Morocco, Myanmar, Pakistan, Panama, Philippines, Repub- With respect to transborder transfers of data to lic of Moldova, Romania, Russian Federation, Ser- developing countries, a self-/co-regulatory bia and Montenegro, Slovenia, Suriname, Turkey, approach is similar to that of a comprehensive Ukraine, Uruguay and Venezuela. approach: there must be adequate protection. Therefore, the three options available under a Before some of the results of the survey are comprehensive approach -namely, enacting legisla- described, it is important to state that certain tion, contractual remedies or safe harbour arrange- responses were vague or contradictory. Thus, the ments are available here as well. However, where results of the survey confirm the lack of awareness a comprehensive approach has essentially two regarding the various implications of data protec- standards, for regular data and sensitive data, a co- tion issues. Moreover, various countries noted regulatory approach may permit variations of that since the data protection laws were adopted those standards, depending on the industry or sec- recently, there is still no experience in their imple- tor. An adequate level in one sector may not be mentation. Also, some data protection authorities adequate in another. Thus, individual undertak- or agencies are not yet fully operational. ings in an industry that would not meet the other country's sector standards might need to put in In all countries that answered the questionnaire, place contractual arrangements. with only two exceptions, the protection of pri-

E-COMMERCE AND DEVELOPMENT REPORT 2004 168 CHAPTER 6: PROTECTING PRIVACY RIGHTS IN AN ONLINE WORLD vacy is established at constitutional level. While Finally, it should be noted that security concerns the constitutional protection may be important, play a role in the regulation of data protection: it is by no means sufficient in itself, as the imple- more than one State mentioned them as an impor- mentation of the good practice principles (distant limitation on rights to privacy. cussed above) is not guaranteed. Some countries stated that even though they do not have specific 2. Concluding remarks and policy data protection legislation, some form of protec- recommendations tion may be derived from other legislation. Other countries indicated that they have sectoral legislation and are in the process of drafting a The right to privacy is not a new concept, and has more comprehensive law on data protection. The been solidified over the years through incorpora- rationale stated for more comprehensive legislation into numerous treaties, conventions and dec- tion is the desire to have internationally recog- larations. As e-commerce has developed, so have nized standards that would facilitate international the means to amass, exploit and retrieve greater trade. amounts of personal information. Although this may seem a threat to our privacy, in many regards it may be viewed as beneficial. It is this paradoxi- The majority of the countries that answered the cal contrast between keeping personal informa- questionnaire have adopted a comprehensive tion private, while allowing use of that informa- approach, but this result probably does not tion to generate business and facilitate e- reflect the global situation as most of the coun- government, that is at the heart of the current data tries adopting the omnibus approach are Euro- protection debate. Regulation that permits indi- pean or South American. In some of these coun- viduals to control the use of their personal infor- tries, in addition to a general law protecting the mation may limit to some extent the information privacy of data subjects, there are specific regula- available and has a cost with regard to implemen- tions for specific professions or services. The sec- tation. On the other hand, failure to provide ade- tors for which in most legislation there are spe- quate protection may allow greater use of such cific provisions are always the same: banking, information, but also dissuade many consumers lawyers, notaries, statistics, archives, health, mili- from utilizing Internet-based services and inhibit tary and police, intelligence services, taxation and information flows from protective regimes to scientific research. Interestingly, in some coun- non-protective regimes. tries, besides primary omnibus legislation on data protection there are codes of conduct and profes- Thus, policy makers from developing countries sional practice. These codes do not in principle need to understand the implications of the differ- have binding force and therefore represent a very ent interests at stake and make an attempt to bal- flexible instrument whose application could be ance them. envisaged in other fields. Awareness of data protection issues should be fur- The same sectors that also receive specific legislative ther promoted, since, as shown by the survey, consideration under the comprehensive approach there is still some confusion about the nature, are the only ones normally regulated according to importance and implications of those issues. This the sectoral approach. Only two countries have could be done through efforts to educate the pub- adopted a sectoral approach. lic on their privacy rights, to educate business about how to comply with privacy regulations Another large group of countries have chosen a and to assist companies in establishing privacy self-/co-regulatory approach. Even among coun- policies. tries adopting a similar approach some differences are noteworthy. For instance, while in some coun- Regardless of the regulatory approach adopted to tries it is possible to access and have corrected per- address data protection issues, every effort should sonal information relating to a specific sector (i.e. be made to enact a technologically neutral regula- banking or legal), the same is not possible in other tory framework, capable of responding to the rap- countries. Also, the remedies available to individu- idly evolving online environment. als to redress any infringement of data protection rules vary enormously, but this may also depend When examining the regulatory response of devel- on the peculiarities of the domestic legal systems. oping countries to the issue of protecting personal

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 6: PROTECTING PRIVACY RIGHTS IN AN ONLINE WORLD 169 data, it is obviously necessary to distinguish international developments. The legislation between the policy drivers that dictate and under- should promote the country as: pin the regulatory framework and the regulatory mechanisms and tools utilized to achieve them. In 1. A communications and multimedia hub terms of policy drivers, the demand for develop- where the national adoption of e-based ing country Governments to address the issue of transactions is expected to be high; protecting personal data may primarily originate 2. A premier investment centre for the com- from a domestic agenda or from developments munications and multimedia industry; abroad. 3. A premier test-bed for applications of information and communications technol- At a domestic level, data protection will generally ogies; be focused more on concerns about the use and abuse of personal data by the public sector, rather 4. A preferred trading partner in the communications and multimedia industry that than by the private sector. The value of an individ- provides international standards of per- ual's data is obviously directly related to a nation's sonal data protection.34 state of economic development, the sophistication of private sector activity and the purchasing Whether calls for data protection regulation pri- power of consumers. Personal data as an asset are a marily reflect domestic concerns or are a reaction particular feature of service sector economies, spe- to the legal situation in other countries, Govern- cifically the information economy, not agrarian or ments will obviously need to consider the appro- industrializing economies. Of the two broad priate regulatory approach comprehensive, secto- groupings of interests represented under the con- ral or self-/co-regulatory. cept of data protection, the interests pertaining to individuals as citizens, protected from arbitrary • The first consideration will involve the governmental interference or participating in the identification of the major trading partner. democratic process, generally drive domestic calls If the partner is, for instance, the United for data protection regulation. States, there might not be the need to adopt stringent or comprehensive regulation as in The pressure for a regulatory response to protect the case in which the major trading party personal data may arise from developments would follow the EU approach. abroad. As noted in the introduction, developing • The cost of regulation will then be a critical countries may perceive a need to address issues of factor. The cost associated with a compre- data protection to facilitate their participation in hensive or omnibus approach, specifically the global information economy, so as to ensure the establishment of a dedicated regulatory that an absence of protection does not constitute a authority, will generally be excessive for barrier to the flows of data between developed and most developing countries, especially if developing economies. We saw at the beginning of borne by the private sector through licens- the chapter the example of the Indian outsourcing ing or notification fees. However, in terms industry. The Indian National Association of Soft- of addressing privacy concerns vis-à-vis pub- ware and Service Companies has exerted pressure lic sector infringements, an authority inde- on the Indian Government to take some form of pendent from government will generally be regulatory action to help forestall any reaction .31 necessary in order to provide the necessary from Europe Moreover, after the adoption of trust and assurance as regards its activities. the Data Protection Directive, the possibility of The regulatory authority may not have an restrictions on the transfer of personal data from exclusively data protection remit, which the EU has been an added impetus for countries mitigates the costs involved.35 such as Australia, Canada32, Philippines33 to put in place or at least try to work out comparable • A sectoral regulatory response may be data protection schemes. appropriate to address specific uses and abuses of personal data, whether driven by The rationale for drafting a new piece of legisla- domestic or foreign concerns. In the tele- tion on data protection given by the Ministry of communications sector, many developing Energy, Communications and Multimedia of countries have established regulatory Malaysia reflects both domestic concerns and authorities as part of an ongoing liberaliza-

E-COMMERCE AND DEVELOPMENT REPORT 2004 170 CHAPTER 6: PROTECTING PRIVACY RIGHTS IN AN ONLINE WORLD

tion process within the sector.36 Also, in the be appropriate in terms of the public sector financial sector, nearly all countries main- use of personal data. tain a distinct regulatory regime, which may • Governments of developing countries, espe- address the protection of consumers of financially those that are members of regional cial services, as well as the wider strategic economic groupings, should be encouraged economic aspects of the sector. These new or to establish cooperative relationships, so as existing regulatory bodies may be capable of to increase their capacity to deal with pri- embracing data protection and privacy issues vacy and data protection issues. within their spectrum of duties. • In addition to a regulatory approach, volun- • Whilst a self-regulatory or co-regulatory tary adherence to privacy principles should approach may be appealing in terms of min- be promoted both in the private and in the imizing the public costs of regulation, its public sector. This could be done through success depends on a sufficiently strong and the introduction of flexible instruments such active private sector, willing and able to as codes of conduct or guidelines or through fund the regulatory activity. It is unlikely to the promotion of trust mark initiatives.

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 6: PROTECTING PRIVACY RIGHTS IN AN ONLINE WORLD 171

Annex I List of States that completed the questionnaire, and their laws on data protection

Argentina: Constitution, articles 18, 19, 33 and 43; Civil Code, art. 1071; Data Protection Law n. 25.3297/ 2000 and its Regulatory Decree n.1558/2001

Belarus: Constitution, art. 28; Law on Electronic Documents n. 357-3 of 10 January 2000; Decree of the Council of Ministers on State Programme on Informatisation n. 1819 of 27 December 2002; Presidential Decree n. 195 of 6 April 1999 amending Some Issues of Informatisation

Bulgaria: Constitution, articles 30, 32, 33, 34, in State Journal n. 56 of 13 July 1991, amended in State Jour- nal n. 85 of 26 September 2003; Law for the Protection of Personal Data, in State Journal n. 1 of 4 January 2002; Law on Telecommunications, in State Journal n. 88 of 7 October 2003; Law for the Electronic Doc- ument and Electronic Signature, in State Journal n. 34 of 6 April 2001, amended on 29 December 2001

Colombia: Constitution, articles 15 and 20; Telecommunication Decree n. 1900 of 1990; Resolution n. 575 of 7 December 2002

Croatia: Constitution, art. 37; Law on the Protection of Personal Data

Czech Republic: Constitution, art. 3, available at http://www.psp.cz/cgi-bin/eng/docs/laws/constitution.html; Charter of Fundamental Rights and Freedoms, available at http://www.psp.cz/cgi-bin/eng/ docs/laws/charter.html; Act 101 of 4 April 2000 on the Protection of Personal Data and on Amendment of Some Related Acts, available at http://www.uoou.cz/eng/101_2000.php3

Denmark: Constitution; Act on Processing of Personal Data n. 429 of 31 May 2000; Access to Public Administration Files Act n. 572 of 19 December 1985; Financial Business Act n. 453 of 10 June 2003

Dominican Republic: Constitution, art. 8; General Telecommunication Law n. 153 of 27 May 1998

Egypt: Constitution

Estonia: Constitution, available at http://www.president.ee/eng/ametitegevus/;

Personal Data Protection Act of 12 June 1996, published in State Journal I 1996, 48, 994, available at http://www.esis.ee/ist2004/103.html http://www.esis.ee/legislation/protection.pdf

Finland: Constitution, section 10, available at http://www.om.fi/21910.htm; Personal Data Act n. 523 of 1999; Act on the Protection of Privacy in Working Life, n. 477 of 2001; Act on the Protection of Privacy and Data Security in Telecommunications n. 565 of 1999

Guatemala: Constitution, articles 19, 22, 25 and 28

Italy: Constitution, articles 2, 14 and 15; Personal Data Protection Code, Legislative Decree n. 196 of 30 June 2003

Jordan: Constitution, articles 7, 10 and 18; Statistic Law n. 8 of 2003; Criminal Law n. 16 of 1960; Labour Law n. 8 of 1996; Telecommunication law n. 13 of 1995

E-COMMERCE AND DEVELOPMENT REPORT 2004 172 CHAPTER 6: PROTECTING PRIVACY RIGHTS IN AN ONLINE WORLD

Latvia: Constitution, art. 96, Personal Data Protection Law of 23 March 2000, available at http:// www.dvi.gov.lv

Lebanon: No laws provided

Lithuania: Constitution, articles 22 and 25; Law on Legal Protection of Personal Data n. IX-1296 of 21 Jan- uary 2003, available at http://www3.lrs.lt/cgi-bin/preps2?Condition2=208886&Condition2

Malta: Constitution, art. 32, available at http://www.gov.mt/frame.asp?l=2&url=http://justice.gov.mt/; Data Protection Act n. XXVI of 2001

Mexico: Constitution, articles 7 and 16; Federal Law of Transparency and Access to

Public Governmental Information, published in the Official Journal on 11 June 2002, available at http:// www.ifai.org.mx/transparencia/LFTAIPG.pdf; and further regulations, available at http://www.ifai.org.mx

Monaco: Constitution, art. 22; Law on the Treatment of Nominal Information n. 1.165 of 23 December 1993 and its Regulatory Decree n. 13.327 of 12 February 1998

Morocco: Constitution, preamble and article 11; Code of Public Freedoms; Criminal Code, as amended by Law n. 07/03; Press Code

Myanmar: No laws provided

Pakistan: Constitution

Panama: Constitution, art. 29; Law n. 24 of 22 May 2002, on Credit Transactions operated by the Elec- tronic Systems, published in the Official Journal n. 24,559 of 24 May 2002; Law n. 68 of 20 November 2003 on the Right to Privacy of Patients; Law n. 9 of 1998 on Banking

Philippines: Constitution; Bank Secrecy Law

Republic of Moldova: Constitution; Law on Access to Information, n. 982-XIV of 11 May 2000, published in the Official Journal nn. 88-90 on 28 July 2000

Romania: Constitution, art. 28; Law n. 676 of 21 November 2001 on the Processing of Personal Data and the Protection of Privacy in the Telecommunications Sector; Law n. 677 of 2001 on Persons’ Protection regarding Processing of Personal Data and the Free Movement of those Data

Russian Federation: Constitution, articles 23 and 24; Federal Law on Information, Informatization and the Protection of Information n. 24 of 20 February 1995 as amended by Federal Law n. 15 of 10 January 2003; Federal Law n. 17 of 3 February 1996 on Banks and Banking; Federal Law n. 2124-1 of 27 December 1991 on Mass Media; Federal Law on Health Protection n. 5487-1 of 22 July 1993

Serbia and Montenegro: Constitution, articles 18 and 20

Slovenia: Constitution, art. 38; Personal Data Protection Act n. 8, published in the Official Journal n. 59/ 99, 57/2001 and 59/2001; Criminal Code, art. 154

Suriname: Constitution, art. 17; Personnel Act n. 195 of 1962 as amended by State Journal n. 77 of 2003 on Confidentiality Duties for Government Officials; Act on the Supervision of the Bank and Credit System n. 63 of 1986

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 6: PROTECTING PRIVACY RIGHTS IN AN ONLINE WORLD 173

Turkey: Constitution, articles 20, 21 and 22; Law on the Right to Information n. 4982 of 9 October 2003

Ukraine: Constitution, articles 31 and 32; Law on the Protection of Information in Automatized Systems

Uruguay: Constitution, articles 7, 28, 29, 72 and 332; Law on the Press n. 16099 of 3 January 1989; Law on Statistics n. 16616 of 20 October 1994; Decree on Financial Intermediation n. 15.322 of 17 September 1982; Law on Banking n. 16.696 of 30 March 1995; Decree on the Clinical History of Patients of 30 Sep- tember 2003

Venezuela: Constitution, articles 28, 47, 48, 60 and 143; Law on Messages of Data and Electronic Signa- tures n. 1204 of 10 February 2001, published in the Official Journal n. 37 of 28 February 2001

E-COMMERCE AND DEVELOPMENT REPORT 2004 174 CHAPTER 6: PROTECTING PRIVACY RIGHTS IN AN ONLINE WORLD

Annex II Websites of data protection authorities and other relevant websites

Australia: http://www.privacy.gov.au/ Austria: http://www.dsk.gv.at/ Belgium http://www.privacy.fgov.be/ Canada: http://www.privcom.gc.ca/ Cyprus: http://www.privireal.org/countries/cyprus.htm Czech Rpublic: http://www.uoou.cz/ Denmark: http://www.datatilsynet.dk/ Finland: http://www.tietosuoja.fi/ France: http://www.cnil.fr/ Germany: http://www.bfd.bund.de/ Greece: http://www.dpa.gr/ Guernsey: http://www.dpcommission.gov.gg/ Hong Kong (China): http://www.pco.org.hk/ Hungary: http://abiweb.obh.hu/abi/ Iceland: http://www.personuvernd.is/tolvunefnd.nsf/pages/index.html Ireland: http://www.dataprivacy.ie/ Isle of Man: http://www.gov.im/odps/ Italy: http://www.garanteprivacy.it/garante/navig/jsp/index.jsp Japan: http://www.soumu.go.jp/english/index.html Jersey: http://www.dataprotection.gov.je/ Latvia: http://www.dvi.gov.lv/ Liechtenstein: http://www.sds.llv.li/ Lithuania: http://www.ada.lt/ Luxembourg: http://www.cnpd.lu/ Malaysia: http://www.ktkm.gov.my/ Malta: http://www.dataprotection.gov.mt/page.asp?p=1368&l=1 Mexico: http://www.ifai.org.mx/ Netherlands: http://www.cbpweb.nl/ New Zealand: http://www.privacy.org.nz/ Norway: http://www.datatilsynet.no/ Poland: http://www.giodo.gov.pl/ Portugal: http://www.cnpd.pt/ Republic of Korea: http://www.kisa.or.kr/english/ Romania: http://www.avp.ro/

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 6: PROTECTING PRIVACY RIGHTS IN AN ONLINE WORLD 175

Slovakia: http://www.dataprotection.gov.sk/buxus/generate_page.php3?page_id=1 Spain: https://www.agpd.es/index.php Sweden: http://www.datainspektionen.se/ Switzerland: http://www.edsb.ch/ Thailand: http://www.oic.thaigov.go.th/eng/engmain.asp United Kingdom: http://www.informationcommissioner.gov.uk/ United States of America: Federal Trade Commission, not a data protection authority, http:// www.ftc.gov/ Council of Europe: http://www.coe.int/T/E/Legal_affairs/Legal_co-operation/Data_protection/ European Union: http://europa.eu.int/comm/internal_market/privacy/index_en.htm International Chamber of Commerce: http://www.iccwbo.org/home/statements_rules/menu_rules.asp

E-COMMERCE AND DEVELOPMENT REPORT 2004 176 CHAPTER 6: PROTECTING PRIVACY RIGHTS IN AN ONLINE WORLD

References and bibliography

Bennet M (2004a). EU targets offshore data, IT Week, 13 April 2004, available at http://www.itweek.co.uk/News/ 1154327.

Bennet M (2004b). India mulls EU safeguards, vunet.com, 26 February 2004, available at http://www.vnunet.com/ print/1153077. Blume P (2002). Protection of Informational Privacy, Copenhagen, DJOF Publishing.

Bygrave L (2002). Data Protection Law: Approaching its Rationale, Logic and Limits, Dordrecht, Kluwer.

Cate F H (1998). Privacy in the information age, Washington D. C., Brooking Institution Press. Clarke R (2001). Introducing PITs and PETs: Technologies affecting privacy. Privacy Law & Policy Reporter 181-188, http://www.anu.edu.au/people/Roger.Clarke/DV/PITsPETs.htm.

Hatcher S (2001). Changing the social meaning of privacy in cyberspace. Harvard Journal of Law and Technology, 15:149.

Korea Information Security Agency, (KISA), (2002). Korea Personal Information Protection Annual Report, available at http://www.cyberprivacy.or.kr/english/main.html. Kuner C (2003). European Data Privacy Law and Online Business, Oxford University Press.

Litman J (2000). Information Privacy/Information Property, Symposium on Cyberspace and Privacy: A New Legal Paradigm? Stanford Law Review, 52 :1283-1313.

Marlin-Bennett R (2004). Knowledge Power: Intellectual Property, Information and Privacy, Connecticut, Lynne Rien- ner Publishers.

Michael J (1994). Privacy and Human Rights: An International and Comparative Study, with Special Reference to Devel- opments in Information Technology (in association with UNESCO), New Hampshire, Dartmouth. Privacy and Human Rights (2003). Threats to Privacy, available at http://www.privacyinternational.org/survey/ phr2003/threats.htm.

Raul A (2001). Privacy and the Digital State: Balancing Public Information and Personal Privacy, Dordrecht, Kluwer.

Reidenberg J (2001). E-commerce and transatlantic privacy. Houston Law Review, 38: 717-749. Ribeiro J (2004). India poised to tighten data protection law, 25 June 2004, available at http://www.computer- weekly.com/Article130076.htm.

Solove D (2004). The Digital Person: Technology and Privacy in the Information Age, New York University Press.

Tang R (2004). A view from Asia: Laying the foundations for a consolidated approach towards privacy to meet the challenges ahead, 4th IAPP Privacy and Data Security Summit and Expo, 19 February 2004, available at http:// www.pco.org.hk/english/files/infocentre/speech_20040219.pdf. UNCTAD (2003). E-Commerce and Development Report. United Nations publication. Sales no. UNCTAD/SDTE/ ECB/3, New York and Geneva.

Walden I (2003). Data protection. In: Computer Law (eds. Reed and Angel), (5th edition), Oxford University Press, pp.417-454.

Walker K (2002). The costs of privacy. Harvard Journal of Law and Public Policy, 25 (3): 87.

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 6: PROTECTING PRIVACY RIGHTS IN AN ONLINE WORLD 177

Notes

11. Privacy and Human Rights (2003). See http://www.privacyinternational.org/survey/phr2003/threats.htm.

12. See Article 29 Data Protection Working Party Opinion 2/2004, “on the adequate protection of personal data contained in the PNR of air passengers to be transferred to the United States’ Bureau of Customs and Border Protection (US CBP)” (10019/04/EN), available at http://europa.eu.int/comm/internal_market/privacy/docs/ wpdocs/2004/wp87_en.pdf. For an update on the situation see http://www.eurunion.org/news/press/2004/20040079.htm.

13. See www.commonwealth.org. 14. Article XIV(c)(ii).

15. UK White Paper, “Computers and Privacy” (Cmnd 6353), 1975, at 6.

16. In many laws, an individual to whom data relate is generally referred to as the “data subject”. “Individual” and “data subject” are used interchangeably. 17. See Bygrave L (2002).

18. One may think of a recent form of unsolicited contact, used as marketing technique, which directly affects individuals’ privacy –namely, spam.

19. Clarke R (2001). 10. “Your best defense against big brother, you”, Wall Street Journal, 24 January 2000.

11. New e-government study finds ease, engagement, privacy and protection are top priorities, available at http:// www.accenture.com/xd/xd.asp?it=enweb&xd=_dyn\dynamicpressrelease_602.xml.

12. The question of the protection of databases, which has traditionally received separate consideration by legislators, is outside the scope of this chapter.

13. In many laws, the entity processing personal data is referred to as a “data controller”, “data user” or “data processor”. These terms are used interchangeably. 14. General Assembly Resolution A/RES/45/95, 14 December 1990.

15. See subsection: D. 1 below.

16. I.e. binding if contained in an international treaty, and soft law with the value of a mere recommendation if contained in a General Assembly resolution. 17. For an application of the principle see the 2002 annual report prepared by the Korean Information Security Agency (KISA) on the state of personal information in the country: the mother of an elementary school student lodged a complaint because one of the websites she was using for her children’s education required parents to provide excessive information on the children as part of the mandatory information, (Korea Information Secu- rity Agency, 2002, p. 45).

18. A classic example is a travel agent that communicates certain personal data of their client to make and confirm an airline or hotel reservation for that client. If data are to be used or communicated for a different purpose, the individual must be notified and such use must be lawful.

19. To give an example of a possible violation of this principle, one could imagine an organization keeping a list of undischarged bankrupts that does not seek information on persons discharging themselves from bankruptcy. See Walden (2003).

20. Available at http://www1.oecd.org/publications/e-book/9302011E.PDF.

21. Available at http://conventions.coe.int/treaty/en/Treaties/Html/108.htm. 22. General Assembly Resolution A/RES/45/95. Already in 1989 the General Assembly had adopted some draft guidelines (General Assembly Resolution A/RES/44/132, 15 December 1989), which were then submitted to

E-COMMERCE AND DEVELOPMENT REPORT 2004 178 CHAPTER 6: PROTECTING PRIVACY RIGHTS IN AN ONLINE WORLD

the Special Rapporteur of the Commission on Human Rights, Mr. Louis Joined, for a new version which incorporated the comments received by States and by other organizations. 23 Published in the Official Journal, L 281, 31.11.1995, available in 11 different languages at: http://europa.eu.int/ comm/internal_market/en/dataprot/law/index.htm. 24. See www.protecciondedatos.com.ar/resolucionspam.htm. 25. The Singapore National Trust Council is aiming to have all TrustSg merchants full comply with the guidelines of the code by the end of 2004. See http://www.trustsg.org.sg. 26. See subsection E. 4 below. 27. See, for example, Commission Decision of 30/06/2003 on the adequate protection of personal data in Argentina (OJ L 168, 5.7.2003). 28. The Council of Europe model terms are available at http://www.coe.int/T/E/Legal_affairs/Legal_co- operation/Data_protection/Documents/Publications/1ModelContract.asp#TopOfPage. The European Union model terms are available at http://europa.eu.int/comm/internal_market/privacy/modelcontracts_en.htm. 29. “Model clauses for use in contracts involving transborder data flows”, available at http://www.iccwbo.org/ home/statements_rules/rules/1998/

30. An example of a safe harbour arrangement is the agreement between the United States and the EU, which is available at http://www.export.gov/safeharbor.

31. See the introduction to this chapter.

32. See the online article of the Privacy Commissioner of Canada, Ms. Jennifer Stoddart, explaining the reasons for the adoption of the Personal Information Protection and Electronic Documents Act, (PIPEDA), available at http://www.privcom.gc.ca/speech/2004/vs/vs_sp-d_040331_e.asp.

33. See the concerns expressed by the the co-chair of the security subcommitteee of the Philippine Information Technology and Electronic Commerce Council (ITECC), Mr. Dela Cruz, available at http://itmatters.com.ph/ news/news_04162003c.html.

34. Available at http://www.ktkm.gov.my/.

35. In South Africa, for example, privacy issues are considered by the Human Rights Commission, while in Thailand the Office of the Official Information Commission has responsibility for all aspects of public sector use of, and access to, information.

36. See, for instance, the case of Pakistan: one of the stated functions of the Licensing Enforcement Directorate in the Telecommunications Authority is to “protect consumer rights and ensure privacy of the customers”. See http://www.pta.gov.pk/ledirectorate/what.htm.

E-COMMERCE AND DEVELOPMENT REPORT 2004 Chapter 7 ASSESSING COMPETITIVENESS IN THE ICT SECTOR: THE CASE OF TUNISIA

A. Introduction vides for greater promotion of the knowledge- based society, and in particular the information economy, including software production and IT Tunisia occupies a leading position among devel- services (République Tunisienne, 2001a). oping countries with respect to its development of information and communication technologies This chapter provides an analysis of the Tunisian (ICTs) and competitiveness. According to recently ICT sector and identifies links between ICT pol- published economic indicators, Tunisia ranks 34th icy measures, the national and international busi- in the Networked Readiness Index (NRI), which ness environment, corporate strategies and enter- covers 82 countries (World Economic Forum, prise performance. It also examines the extent to 2003a). The country has the highest ranking in which national ICT policies enable ICT compa- Africa and in the Arab world, and is ahead of sev- nies to enhance their competitiveness, in particu- eral European countries. Furthermore, according lar in foreign markets. to the technology achievement index (TAI), in 1999 Tunisia was the leading Arab exporter of In order to evaluate how ICT policies and compet- “recent innovations in high and medium technol- itiveness relate to each other, how they have been ogy” (UNDP, 2001). leveraged in the country and which challenges have to be faced to take full advantage of ICT, an The Tunisian Government is making an effort to analysis is required that goes beyond available foster a supportive environment for ICTs via its macro indicators and country rankings. This chap- national e-strategy. National ICT policies cover a ter will therefore provide an analysis at the sector broad set of development targets concerned with and firm levels to identify the impact of ICT poli- infrastructure, institutions, legislation and educa- cies on business activities and performance, and tion. As host to the second phase of the World 1 hence the competitiveness of companies. The Summit on the Information Society (WSIS), the firm-level analysis will provide insights into the Government is committed to making Tunisia a capacity of companies to gain and sustain competi- knowledge-based society. tive advantages within the given environment.

Most dependent on the ICT environment and For this purpose, a survey was carried out with a related policies is the ICT sector itself. In Tunisia, sample of 49 software and IT service companies in that sector has been one of the fastest-growing in Tunisia (representing about 18 per cent of the the past few years, with an increase in turnover of total sector), which provides the data needed for 260 per cent in software and IT services between the assessment of the sector’s competitiveness. 1997 and 2001. At the same time, the firms that The analysis will be complemented by an overall produce the technologies are one of the main driv- evaluation of how the national ICT environment ing forces behind the country's technological and corporate strategies complement each other development. In recognition of this important and what their impact on the sector’s competitive- role, one of the Government's priorities is to ness is. develop a strong and competitive ICT sector. Its national ICT policies are therefore designed to On the basis of the results of the survey, the chap- give particular support to the domestic software ter identifies the companies' needs for an and IT industry. For example, its current develop- improved policy environment. This will be useful ment plan (covering the years 2002 –2006) pro- to business leaders defining their strategies for

179 180 CHAPTER 7: ASSESSING COMPETITIVENESS IN THE ICT SECTOR: THE CASE OF TUNISIA building competitive advantages in the software software and IT services, further classification into and IT industry. The chapter also provides sugges- two main categories: first, software development tions for policy makers on how to assess and rede- and software manipulating services, such as soft- fine their national ICT strategy so that it impacts ware customization and integration, IT consult- on the competitiveness of the sector, including ing, web development, translation and arabization policies related to the ICT infrastructure, educa- (in the case of Tunisia); and second, IT-based serv- tion, and public financial and non-financial busi- ices, such as database management, data mining, ness development support (BDS). This could be data conversion, and data extraction (World Bank, useful to policy makers from other developing 2002). countries aiming at fostering a competitive national ICT sector. 2. Performance of Tunisia's ICT sector at a glance The following section will provide an overview of the Tunisian ICT sector and its business environ- The overall turnover of the ICT sector3 increased ment. Section C will present the Tunisian national continuously between 1997 and 1999 owing to ICT strategy and policies relevant to the creation substantial investments in ICTs, and declined in of an enabling environment for the development 2000 (chart 7.1). In 2001, this effect was compen- of the ICT sector. Section D presents the results of sated to some extent by earnings from businesses the survey carried out with ICT companies. Sec- initiated during the boom years up to 1999 (Min- tion E draws conclusions and provides concrete istère des Technologies, de la Communication et suggestions related to both business and policy du Transport, 2003). strategies, aimed at enhancing the competitiveness of the sector. Although the turnover of the ICT sector declined in 2000, it is important to note that, driven by the prospering world market, exports of software and B. Overview of the ICT sector IT services doubled at the same time. With an and its business environment increase in turnover of 260 per cent between 1997 to 2001, software and services were a major growth area in the field of ICTs. 1. Definition of the ICT sector In 2001, a process of consolidation took place and There are various initiatives at the international many of the ICT companies disappeared from the level, mainly driven by the UN and the OECD, market (chart 7.2), but employment for the whole to define the ICT sector and the type of activities sector was still increasing (chart 7.3). it comprises, and hence improve data comparability at the international level. This is a challenging Chart 7.1 task. First, given the lack of an internationally Turnover of ICT companies accepted classification, it is difficult to collect com- (hardware and software) parable statistical data for trade in certain products (millions of dollars) and services, such as software and IT services, but these activities are essential to the ICT sector. Sec- ond, there is inadequate implementation of international standards for statistical measurements in many countries and hence a lack of comparability of data. The definition agreed by OECD member states in 1998 will serve as a basis for the analysis in this chapter (OECD, 2002).

The OECD definition is based on the Interna- tional Standard Industrial Classification ISIC Rev. 3.2 But there are limitations to ISIC Rev. 3 regarding the coverage of software and IT services. Therefore, a firm-level analysis requires, with regard to the kind of activities considered to be Source: Ministère des Finances (2003).

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 7: ASSESSING COMPETITIVENESS IN THE ICT SECTOR. THE CASE OF TUNISIA 181

Chart 7.2 Chart 7.3 Number of private ICT companies Employment in private ICT companies

Source: Caisse Nationale de la Sécurité Sociale (2003). Source: Caisse Nationale de la Sécurité sociale (2003).

Strong growth in local demand helped ICT com- companies have disappeared from the market. At panies increase turnover again, before a decline in the beginning of 2004, there were 274 IT software 2002. While firms reduced employment, the struc- and service firms (CNS SSII, 2004). tural realignment within the sector was over and the existing companies remained. This can be 3. National ICT business environment explained by two factors. First, there were lay-offs due to the concentration of the market, for exam- Competitiveness is determined by the productiv- ple through mergers and acquisitions. Second, a ity of companies, or more precisely – in a dynamic number of companies re-allocated employees and approach – by the capacity of firms to increase activities to foreign countries in order to be closer productivity. Firms that are able to maintain an to export customers, for example in Europe. increase in their productivity are more likely to maintain their competitive position in the future In 2002, the sector comprised 680 companies with than those that achieve a higher level of productiv- 6,124 employees (accounting for 2.1 per cent of ity but are unable to increase it further (Porter, total employment). There were 350 private enter- 2003). Therefore, from a policy maker’s point of prises specialized in the field of IT services and view, the main concern is how to create optimal software development, which employed about 50 conditions for rapid and sustainable productivity per cent of the 6,124 employees. The rest of the growth. This section will look at these conditions workforce was distributed among IT departments by addressing two interrelated areas. First, it will of major corporations, public enterprises and pub- look at the quality of the overall business environ- lic administration, hardware production and ment. Second, it will examine the level of sophisti- national IT centres. cation with which firms compete in their domestic and export markets. The link has to be made In the current five-year plan the Government esti- because, as companies move to more sophisticated mates for software and IT service companies an ways of competing, they require changes in the average annual growth in turnover of 42.5 per business environment, for instance more highly cent, from 80 million Tunisian dinar (US$ 58.3 skilled human resources, an improved infrastruc- million) in 2002 to 655 million Tunisian dinar ture, or advanced research institutions (World (US$ 477.2 million) in 2006. The average growth Economic Forum, 2003a). of other industrial sectors in Tunisia is put at 5.7 per cent. As a result, the share of software and IT The following sections will look at the specific services in the gross domestic product (GDP) is business environment for software and IT service projected to increase significantly, from 0.27 per companies in Tunisia. The discussion follows cent in 2002 to 1.5 per cent in 2006 (ITC, 2004). Michael Porter's methodological work on the Despite the investments and growth planned by requirements for a nation or industry to be inter- the Government, many software and IT service nationally competitive (Porter 1990, see annex I).

E-COMMERCE AND DEVELOPMENT REPORT 2004 182 CHAPTER 7: ASSESSING COMPETITIVENESS IN THE ICT SECTOR: THE CASE OF TUNISIA

Chart 7.4 Structure of ICT spending (percentages)

Source: ITC (2004).

In his work, Porter used a diagnostic tool known is on software and about 30 per cent on services. as the “competitiveness diamond”, which requires Whereas in Tunisia and other Maghreb countries, that the economic conditions within which an both are equally represented with about 25 per industry competes be tested against four dimen- cent of spending (chart 7.4). This is primarily sions that have been found to be strong predictors because of the disproportionately higher cost of of competitiveness and success: demand condi- software licences, for example for Windows or tions, factor conditions, the presence of related Oracle, compared with that of local IT services. and supporting industries, and the firm structure and strategy. These dimensions are closely interre- In particular, the revenues of ICT companies are lated. Governments have an influence on all significantly higher for services than for software. aspects of the diamond via legislation, policy and delivery activities. Chart 7.5 Structure of revenues of the ICT sector Demand conditions in the domestic market (millions of dollars) Domestic demand for ICTs

Domestic demand is more important in terms of its character than of its size. It plays a dispropor- tionate role in influencing the capacity of firms to improve products and services over time. There- fore, a closer look has to be taken at the structure of the domestic market in Tunisia and its impact on software and IT service companies (Porter, 1991).

The structure of spending on ICTs, as far as hardware is concerned, is very similar to that in other countries; but there is a significant difference in the international comparison regarding the ratio of services to software spending. For instance, in European countries, 15 – 20 per cent of spending Source: International Data Corporation (IDC) – Central and Eastern Europe and the Middle East and Africa (Cema) (2003).

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 7: ASSESSING COMPETITIVENESS IN THE ICT SECTOR. THE CASE OF TUNISIA 183

This means that for the same budget spent on soft- ica, Africa and the Middle East. Important coun- ware, IT services are more profitable (chart 7.5). tries include France, Germany, Spain, Italy, the United Kingdom, the United States, Canada, Since public investment in ICTs accounts for an Algeria, Morocco, the Libyan Arab Jamahiriya, important share in the overall turnover of the ICT Mauritania, Mali, Rwanda, Cameroon, South sector, it deserves special mention in the discus- Africa, the United Arab Emirates and Oman sion of demand conditions in Tunisia. The overall (Ministère des Technologies, de la Communica- public budget for hardware, software and IT serv- tion et du Transport, 2003). ices is projected to increase from 912.2 million Tunisian dinar (US$ 664.6 million) for the period Chart 7.6 shows that between 1999 and 2000 the from 1997 to 2001, to 1.779 billion Tunisian dinar volume of exports of software and IT services dou- (US$ 1.3 billion) for the period from 2002 to 2006. bled, in line with a fast-growing global demand. In Since 2002, the Government has given a higher 2001, exports suffered from – among other reasons priority to software and IT services than during – the weak demand growth in the global market the previous years (République Tunisienne, for information technology products and services. 2001a). The budget's planned increase of 18.6 per It is interesting to note that despite the crisis in the cent annually (2002 – 2006) is significantly higher global market after 2001, exports of software and for services and software than for hardware (12.3 IT services increased significantly in 2002. In per cent). The most extensive financial resources Tunisia, the downturn in the overall turnover was are reserved for hardware and equipment (which mainly caused by weak domestic demand. are largely imported), but this corresponds to the structure of spending in other countries. Factor conditions

Demand conditions in export markets Key inputs for the ICT sector are human resources, capital, ICT infrastructure, and science Since 1999, Tunisia has been exporting software and research, in terms of efficiency, quality and and IT services. The biggest customers for Tuni- specialization, and the extent to which they deter- sian IT firms are located in Europe, North Amer- mine firms’ competitiveness.

Chart 7.6 Structure of turnover of software and IT service companies (millions of dollars)

Source: Ministère des Finances (2003).

E-COMMERCE AND DEVELOPMENT REPORT 2004 184 CHAPTER 7: ASSESSING COMPETITIVENESS IN THE ICT SECTOR: THE CASE OF TUNISIA

Chart 7.7 kind of training an employee receives, this process Production costs of software supports the continuous input of knowledge and per man-day know-how (Ministère des Technologies, de la (in dollars) Communication et du Transport, 2003).

Low labour costs

A key competitive advantage in the Tunisian ICT sector is the low cost of highly qualified employees (chart 7.7). With 60 – 80 per cent of costs per man- day per unit of software produced, labour is the most important cost driver for software companies. The low level of wages supports effectively competitive prices of IT solutions and services in the international market, for example in Western and East- ern Europe and North America (FIPA, 2002).

Source: FIPA (2002). Capital supply for software and IT service Qualified human resources specialized in ICTs companies

The higher education system is a key provider of Efficient capital markets and flexible financing technological and managerial know-how for IT models are essential to investments in the ICT sec- businesses. Tunisian graduates in ICT studies rank tor. In particular, software and IT service compa- high in the international comparison as far as qual- nies with a somewhat non-tangible asset base ity is concerned (see section C.4). In terms of require very specific financing conditions, com- quantity, the number of graduates specialized in pared with traditional sectors with a more tangi- IT will increase from 1,900 in 2002 to 5,000 in ble asset base. In this regard, there is still a lack of 2005 (Ministère des Technologies, de la Commu- expertise concerning adequate risk evaluation in nication et du Transport 2003). Hence, the quanti- banks and the vast majority of venture capital tative supply is guaranteed and does not affect neg- firms. In general, investments and financing atively the ability of firms to increase projects of large enterprises are preferred. This is a productivity. A different question is whether soft- serious obstacle for software and IT service com- ware and IT service companies can generate suffi- panies in Tunisia in view of the fact that the avail- cient demand for university graduates if the gov- ability of risk capital is an important precondition ernmental estimates for 2002 – 2006 for sector for innovation and business development (World growth cannot be met by the companies. Bank, 2002), and could put them at a disadvantage in relation to competitors in countries with capital Promoting the international experience of stu- markets more experienced in the field of ICT. dents is another important aspect of the educational system. This way language skills other than There are various governmental initiatives to sup- in Arabic and French can be developed effectively. port ICT firms by providing public venture capi- Tunisian exchange students still have a strong tal. Through the Régime d'Incitation à l'Innova- affinity for French-speaking countries. Seventy- tion dans les Technologies de l'Information (RITI) three per cent of all student exchanges are with the Government offers ICT firms the possibility France, Canada, Belgium and Switzerland (Minis- of participating in projects related to research and tère de l’Enseignement Supérieur, de la Recherche development (R&D). A maximum of 50 per cent Scientifique et de la Technologie, 2003). of the project cost may be covered by a bank loan, and at least 50 per cent is venture capital shared by Traditionally, the education system in Tunisia the entrepreneur (minimum 2 per cent), a private focuses on continuous training of employees, venture capital company and the Fonds d'Incita- including in less qualified positions. Tunisian com- tion à l’Innovation dans les Technologies de panies either pay for the training of their own l’Information (FITI). Another public-private ven- employees or have to pay a fee to the public train- ture capital fund is the Tunis Information Tech- ing system. As companies have an influence on the nology Fund (TITF).

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 7: ASSESSING COMPETITIVENESS IN THE ICT SECTOR. THE CASE OF TUNISIA 185

Through these funds, the Government supports Chart 7.8 not only ICT companies, but in the long term Tunisian software and IT service also banks and venture capital firms, in gaining companies by origin of capital experience in financing projects in the field of ICT. It remains to be seen to what extent these funds are used by Tunisian enterprises and whether the capital market will change its traditional patterns regarding risk capital provision for ICT firms. This will be further explored in section D.

Foreign direct investment in ICT Source: Ministère des Technologies de la Communication et du Transport (2003) The potential of the domestic market to attract foreign direct investment (FDI) plays a key role in Related and supporting industries overcoming structural obstacles, such as lack of availability of local venture capital. The presence The availability and the quality of local suppliers of foreign investors in the domestic market can and other supporting industries are important for help Tunisian software and IT service companies the competitiveness of firms. The terms “supplier” develop international partnerships and take part and “industries” should not be misunderstood, in international networks. Collaboration with however. Combined they comprise all organiza- subsidiaries of multinational enterprises (MNEs) tions, institutions and businesses in an up-stream in Tunisia or MNEs investing in Tunisian compa- or down-stream relationship with software and IT nies can support the transfer of know-how. More- service companies (Porter, 1990). “Up-stream” over, Tunisian firms are more integrated into for- refers to the supply side of the value chain of eign value chains and hence, closer to foreign firms, such as research institutions providing tech- markets (Raffa et al., 2002). nological innovations. “Down-stream” refers to activities along the value chain after the actual cre- The beneficial effects of FDI do not automatically ation of software and service solutions. Up-stream come with the presence of foreign firms or capital. and down-stream activities regarding cluster devel- Therefore, steps to promote FDI effectively were opment will be presented in section C.2. The next taken by the government with the establishment subsection looks at financial business support of the Foreign Investment Promotion Agency available to companies. (FIPA). Accordingly, administrative procedures for foreign investors were optimized and the Public financial business support Tunisian market is more accessible to foreign capital (Mansour, 2003). Furthermore, an advanced In addition to venture capital, public funds estab- legal framework for the protection of intellectual lished by the Government are focusing on the property rights was developed, which is essential active support of business processes, having either for efficient know-how transfers. a direct or indirect impact on ICT businesses (see section C.2, table 7.3). Chart 7.8 shows that foreign capital is not widespread among Tunisian software and IT service Various public funds have been created to help dif- companies and only few subsidiaries of MNEs ferent economic sectors to technologically exist. This reflects the fact that the majority of upgrade their production and business processes software and IT service companies are very small in general. The main objective is to increase pro- and therefore less attractive to foreign capital par- ductivity, competitiveness and export perform- ticipation. On the other hand, the availability of ance. As investments in ICTs increased among cost efficient Internet-based communication tech- companies as a result of these funds, software and nologies would support intensive communica- IT service companies benefited indirectly, for tion with distant foreign partners, or between example by providing resource planning systems subsidiaries of MNEs and home markets (World for industrial production. In the domestic market Bank, 2002). That this is an important issue for these funds have a positive impact on the perform- businesses in Tunisia is explained in section D. ance of ICT firms. It is hard to estimate to what

E-COMMERCE AND DEVELOPMENT REPORT 2004 186 CHAPTER 7: ASSESSING COMPETITIVENESS IN THE ICT SECTOR: THE CASE OF TUNISIA extent this enhances the productivity and compet- develop new ones. This rivalry should be seen itiveness of software and IT service companies. from two perspectives. Intense local rivalry On the one hand, the subsidies help to sell soft- among competitors may, on the one hand, keep ware and IT service solutions in the local market, profits low in the home market, but on the other which would be too expensive without the subsi- hand, force companies to enhance advantages that dies. Hence, it is questionable whether the prod- might lead to higher profits in export markets. ucts and solutions would be competitive in export Therefore, the role of the public ICT sector as a markets, without the subsidies. On the other competitor, and the extent to which it influences hand, software and IT service companies might positively or negatively the business of software acquire the necessary size, financial strength and and IT service companies, are important (Porter, know-how in the domestic market to successfully 1980). move into export markets. In Tunisia, 80 per cent of software development Some funds have a direct impact on software and for the public sector and public administration is IT service companies. They concentrate on the carried out by the Centre National de l'Informa- promotion of exports across all economic sectors. tique (CNI). Section D.4 will illustrate in more For example, FAMEX (Fonds d'Accès aux detail that this is a significant share in an impor- Marchés d'Exportation) was established in collab- tant segment of the domestic market. With the oration between the Tunisian Government and remaining 20 per cent, private businesses can the World Bank. Companies have to present their scarcely participate in large national projects as business plan for their export business to the advi- these are primarily assigned to the CNI. sory committee of the fund. Once approved, 50 per cent of the costs of any action undertaken to In the domestic and export markets, the Centre enter the market are covered by FAMEX, such as des Etudes et Recherche en Télélcommunication marketing efforts and business travel. The collabo- (CERT) is active in the field of IT services and ration with FAMEX includes intensive manage- software development. CERT mainly supplies the ment consultancy for the company, which trans- public administration and firms in the public sec- fers the expertise of the fund to the new export tor in Tunisia. As an exporter, it has carried out business. The Fonds de Promotion et Développe- IT consulting and IT management projects in vari- ment d'Exportation (FOPRODEX) is also an ous African countries and was involved in techni- export promotion fund, which covers 15–50 per cal assistance projects in several Gulf States cent of costs for certain activities undertaken by a (UNDP and CEPEX, 2004). company, such as participation in trade fairs and certain kinds of advertising material. Both Therefore, public ICT producers are the principal FAMEX and FOPRODEX have a positive impact rivals of private software and IT service compa- on the competitiveness of Tunisian software and nies. A frequent argument against the dominance IT service companies. Collaboration with the of CNI and CERT in these markets is that private funds reduces market access barriers as it permits software and IT service companies are hindered companies to go abroad and market products with from achieving a certain critical size and financial less financial effort. Companies thus learn how to strength, which would allow them to successfully market their products effectively and, in the long tap export markets. term, they may be able to approach the market without the support of the funds. A call for liberalization to open the market for private software and IT service companies has to be seen as a trade-off against other national and 4. Firms’ strategies and rivalry sectoral development priorities of the Govern- ment. Therefore, the dominance of public ICT Strategies are determined by a variety of options producers in certain market segments should not that an enterprise has to develop, on the basis of be regarded as a barrier to growth for private its strengths and advantages compared with those firms. An important question is whether all func- of its competitors, and in order to maximize prof- tions and responsibilities of public ICT provid- itability. The presence of domestic competitors, ers should be transferred to private firms, or for example, negates basic factor advantages and whether some functions should stay with public forces firms to enhance existing advantages or to providers.

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 7: ASSESSING COMPETITIVENESS IN THE ICT SECTOR. THE CASE OF TUNISIA 187

C. Tunisia's national e-strategy lion Tunisian dinar (US$ 1 billion) in ICT infrastructure, including telephone networks, Internet backbone, and other digital communication net- The e-strategy of a country defines the overall 4 works. The Tenth Plan (2002–2006) provides for framework for national ICT development. In an investment of 2.8 billion Tunisian dinar (US$ Tunisia, this framework is embedded in the Gov- 2.1 billion) (République Tunisienne, 2001a). ernment's five-year plans for national economic Despite these investments, the country still ranks and social development, which give high priority internationally below-average regarding the availa- to ICTs (République Tunisienne, 2001a). As a bility and quality of telecommunication and Inter- result, the country achieved the fourth best Gov- net access, particularly in rural areas (World Eco- ernment ICT readiness scoring after Singapore, nomic Forum 2003b). Improving rural access is Taiwan Province of China and Finland in the addressed in the Tenth Plan, which aims at a total NRI, in particular a high-valued ICT competence of 13 telephone subscribers per 100 inhabitants in of public officials and a high ranking for govern- 2006 (in rural areas). However, it is important to mental procurement of advanced technology note that significant progress has been achieved products. Furthermore, in terms of ICT usage, the over the last years, as budget allocation for Government performed better than many other national telephony has been a priority. As a result, countries, including France, Portugal, Spain, Hun- the combined number of fixed line and mobile gary and India (World Economic Forum, 2003b). phone subscribers per 100 inhabitants increased from 6.5 in 1997 to 15 in 2001. This section provides an overview of Tunisia’s ICT policies, programmes and projects, including Another important aspect regarding the develop- infrastructure, education and science, business ment of the telecommunications infrastructure development support, and selected supplementary concerns the deregulation of the national telecom- ICT initiatives driven by various non-governmen- munications market. Tunisia’s telephone infra- tal stakeholders. It will also identify future chal- structure is characterized by relatively low costs lenges that the Government is facing as regards its for telephone and mobile phone subscriptions. ICT development agenda outlined in the current But prices for fixed line phone calls are still com- Tenth Plan, covering the period 2002–2006. paratively high, owing to the monopoly of Tuni- sie Telecom. 1. ICT infrastructure On the other hand, the progressive liberalization During the period of the Ninth Plan (1997 – of the market for mobile communication is bear- 2001), the Tunisian Government invested 1.4 bil- ing fruit. The costs for mobile phone calls are

Table 7.1 Public Internet service providers in Tunisia

Public Internet service provider Network Institutions connected ATI – Agence Tunisienne d'Internet General national / international backbone Public institutions Tunisie Telecom General national backbone Ministry of Communication, Technology and Transport and its agencies CCK – Centre de Calcul El–Khawarizmi RNU – Réseau National Universitaire Universities INBMI – Institut National de Bureautique et de EDUNET Primary and secondary schools Micro-informatique SOTETEL-IT / IRSIT – Institut Régional des Scien- RNRT – Réseau National de la Recherche Research institutions ces Informatiques et des Télécommunications et de la Technologie

CIMSP – Centre informatique du Ministère de la RNS – Réseau National de Santé Hospitals Santé Publique IRESA – Institut de la Recherche et de l'Enseigne- AGRINET Ministry of Agriculture, agricultural institutions for ment Supérieur Agricole research and education

E-COMMERCE AND DEVELOPMENT REPORT 2004 188 CHAPTER 7: ASSESSING COMPETITIVENESS IN THE ICT SECTOR: THE CASE OF TUNISIA

Table 7.2 Telecommunication indicators

Fixed-line Cost of fixed- Mobile phone Cost of mobile Internet hosts nternet users Personal com- subscribers line calls (a) subscribers calls(a) per 10 000 per 10 000 puters per 100 per 100 per 100 inhabitants inhabitants inhabitants inhabitants inhabitants Algeria 6.10 0.02 1.28 0.13 0.26 159.78 0.77 Egypt 11.04 0.01 6.68 0.68 0.45 282.26 1.66 Hungary 36.12 0.09 67.60 0.68 191.59 1576.04 10.84 India 3.98 0.02 1.22 0.12 0.75 159.14 0.72 Jordan 12.66 0.04 22.89 0.49 7.72 576.97 3.75 Lebanon 19.88 0.07 22.70 0.43 21.08 1 171.30 8.05 Morocco 3.80 0.14 20.91 0.64 0.90 236.14 2.36 Poland 29.51 0.08 36.26 - 170.30 2 299.98 10.56 Romania 19.44 0.11 23.57 0.54 18.90 1,014.71 8.30 Saudi Arabia 14.39 0.03 21.72 0.76 6.73 646.12 13.67 South Africa 10.66 0.07 30.39 0.56 43.75 682.01 7.26 Syrian Arab Rep. 12.32 0.01 2.35 0.26 0.01 129.11 1.94 Tunisia 11.74 0.02 5.15 0.52 0.35 516.81 3.07 United Arab Emirates 31.35 – 69.61 0.25 139.40 3 131.63 11.99

Source: ITU (2004), UNCTAD (2003a). (a) in dollars per three minutes call.

significantly lower than in most other Arab coun- for online diagnostics. This is very different from tries since the second mobile phone provider – the Réseau National de Recherche et de Technolo- Tunisiana, a subsidiary of Orascom, Telecom gie (RNRT), which connects research institutions Tunisie – received the licence from the Tunisian and has a heavy demand for transfers of very large Government and the monopoly of Tunisie Tele- files (World Bank, 2002). com was weakened. This has led to an increase in the number of mobile phone subscribers over the Private Internet access has improved constantly past two years. While there were 503,900 mobile over the past years and several large private ISPs phone subscribers in 2002, estimates for 2006 are have entered the market. Today, there are five as high as 3,000,000. major players: Planet Tunisie, 3S Global Net, HexaByte, Tunet and Topnet. In addition, there As far as Internet access is concerned, there are are so-called Publinets, publicly supported Inter- currently 12 Internet service providers (ISPs) in net access points across the country. Fifty per cent Tunisia. The Government established a number of of the initial investment in these access points is public ISPs to exclusively connect certain public met by the Government and the remainder can be institutions (table 7.1) and to make the Internet financed by low-interest loans. There were 305 accessible to sectors of particular importance for Publinets in 2004 (ATI, 2004). These develop- the economy, even if the average access for the ments increase competition and hence provide rest of the country remains very low. Specific greater affordability and access to the Internet. needs, such as the Internet bandwidth of different institutions, were taken into account for the net- As a result, the number of Internet users increased work configuration. For instance, the Réseau from 110 in 1997 (ITU, 2004) to 631,000 in 2003 National de Santé (RNS), which connects hospi- (ATI, 2004). However, with 0.35 (2002), the num- tals, is supposed to enable tele-medicine and has ber of Internet hosts per 10,000 inhabitants is still specific requirements concerning live stream data low by international comparison (table 7.2).

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 7: ASSESSING COMPETITIVENESS IN THE ICT SECTOR. THE CASE OF TUNISIA 189

Table 7.3 Targets of business development support programmes

Programme Target Impact on ICT sector RITI – Régime d'Incitation à l'Innovation dans les Promotion of entrepreneurship and innovation in the ICT Direct Technologies de l'Information sector FITI – Fonds d'Incitation à l'Innovation dans les Tech- Promotion of investments in ICT Direct nologies de l’Information Mise-à-Niveau General competitiveness, technology absorption, quality Direct/Indirect certification FAMEX – Fonds d’Accès aux Marchés d’Exportation Export promotion, management consultancy, financing of Direct/Indirect market access cost FOPRODEX – Fonds de Promotion et Développement Export promotion, financing of market access cost Direct/Indirect d'Exportation FOPRODI – Fonds de Promotion et Développement Large industrial projects, efficiency, productivity Indirect d'Industrie

2. Business development support tions and business consultancies, which help to maximize the companies’ success and facilitate Financial and non-financial business development innovation (Porter, 1998). In Tunisia, public support (BDS) plays a central role in the Tunisian research institutions such as the Ecole Supérieure e-strategy. Through various public promotion des Communications (Sup’Com) and the Institut programmes, projects and funds, the Government Supérieur des Études Technologiques en Commu- aims at a wide dissemination of ICTs in the Tuni- nications (ISET’Com), play a key role as drivers for sian economy. Some funds are directly designed innovation and as partners for companies (ITU, for ICT companies, so as to support entrepreneur- 2002b). Since 2001, ISET’Com has been establish- ship and innovations (table 7.3). Others encourage ing enterprise incubators in order to promote companies from different sectors to invest in entrepreneurship in the ICT sector, by linking ICTs, for example in software solutions or hard- research, higher education and financial support. ware equipment. One major project is the technopole Elgazala in Technology parks Ariana, created in 1999. By 2003, the number of Tunisian and foreign firms located in the park had Cluster formation is an important driver for pro- increased to 40, with about 520 engineers ductivity and competitiveness of software and IT (www.elgazalacom.nat.tn 2004). Since 2000, Elga- service companies as it aims to create closely zala has been a member of the Association Inter- linked, efficient relationships up-stream, down- nationale des Parcs Scientifiques (AIPS) and has stream and among firms at the same stage of the established partnerships with technopoles in Bari value chain (Porter, 1991). An important feature (Italy) and Sophia Antipolis and Marseille of ICT development policy in Tunisia is ICT clus- (France). The motivation for this international ter development, by building technology parks, collaboration among technopoles is transfer of so-called technopoles. This concept follows the know-how regarding the promotion of innova- International Business Incubation Systems (IBIS) tion and incubator development. Similar technop- approach by UNIDO, which aims to promote ole projects are about to be launched, such as technological and industrial development Sakiet Ezzit in Sfax and Hammam Maarouf in (UNIDO, 2004). Sousse (Ambassade de France en Tunisie, 2003).

The parks make it easy for local businesses with 3. IT skills and education similar products and services to locate around existing industrial structures (as opposed to somewhere else). In addition, the clusters are supported by The Tunisian Government has always set as a pri- institutions such as financial and research institu- ority the development of human resources. There-

E-COMMERCE AND DEVELOPMENT REPORT 2004 190 CHAPTER 7: ASSESSING COMPETITIVENESS IN THE ICT SECTOR: THE CASE OF TUNISIA

Chart 7.9 Chart 7.10 Public spending on higher education Public spending on higher education (millions of dollars) (in percentage of GDP)

Source: Ministère de l’Enseignement supérieur, de la Recherche Scientifique Source: Ministère de l’Enseignement supérieur, de la Recherche Scientifique et de la Technologie (2003). et de la Technologie (2003). fore, education plays a major role in the national mathematics and science education in particular is development plan and accounts for a relatively high and Tunisia is ranked as the sixth best coun- large share of public spending (charts 7.9 and try in the NRI. 7.10). This explains the good ranking at the international level for Tunisia’s public spending on Despite considerable efforts made in the area of education. education, adult literacy is still low. Out of 82 countries covered by the NRI, Tunisia is ranked The higher-education system continued to place 74th, with an average adult illiteracy rate of 29 per great emphasis on technical studies, so as to enable cent (World Economic Forum, 2003a). In addi- and support the development of ICTs economi- tion, there is relatively poor technology awareness cally and socially (chart 7.11). The quality of on a broad social scale. But these issues are critical to improving the overall e-literacy in Tunisia (ITU, 2002a). The Government has therefore initi- Chart 7.11 ated programmes to enhance technology awareness in the country and familiarize people with Number of students in ICT-related the opportunities provided by new technologies, technical studies such as the Internet Caravans, Internet Week and OscarWeb (ITU, 2002b).

4. Future ICT development challenges

A key challenge with regard to developing the Tunisian information society is the low individual usage and adoption of ICTs. Government initiatives, such as Ordinateur Familial,5 were supposed to increase the number of people using computers at home and contribute to a broader dissemination of hardware. Crucial to greater penetration by the Internet is improved access (chart 7.12). Section

Source: Ministère de l’Enseignement Supérieur, de la Recherche Scientifique C.2 outlined some of the improvements over the et de la Technologie (2003). past years in the area of infrastructure, but much Includes computer science, engineering, mathematics, physics and media design. remains to be done.

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 7: ASSESSING COMPETITIVENESS IN THE ICT SECTOR. THE CASE OF TUNISIA 191

Chart 7.12 Individual usage: A challenge for the knowledge-based society

Source: World Economic Forum (2003a).

Internet use might also be improved by increas- and promotes investments in ICTs. The second ingly offering administrative services online. Some is the role that software and IT services can play services are already offered online, such as online in exports. Currently, neither Tunisian software registration for students at universities and tax nor IT service firms have a significant presence declarations via Internet. But content and applica- in international markets. The first steps have tion development cannot be driven by the Gov- been taken to respond to that challenge. The ernment alone. Private initiatives are also neces- Government, in collaboration with the World sary in order to take full advantage of the Internet Bank, has initiated the export promotion pro- and to make businesses and private persons use the gramme Fonds d’Accès aux Marchés d’Exporta- Internet more actively. tion (FAMEX). Other action that could be taken in this regard will be addressed in more The growth of the information economy is a detail in section D. priority for national development. On the business side, this encompasses mainly software production and IT services. These potential growth D. Firm strategies and sectors are particularly interesting for two reasons. One is the role they play as regards greater competition: Survey results integration of ICTs into the economy by supporting Tunisian manufacturing industries in The previous two sections outlined the business upgrading their technological base (République environment in which the Tunisian ICT compa- Tunisienne, 2001b). For instance, the Mise-à- nies operate, as well as the national policies that Niveau6 programme is oriented in that direction impact on the business environment.

E-COMMERCE AND DEVELOPMENT REPORT 2004 192 CHAPTER 7: ASSESSING COMPETITIVENESS IN THE ICT SECTOR: THE CASE OF TUNISIA

The overall business environment, including venture capital firms, public administration and demand and factor conditions, availability of business associations. Subsequently, a structured related and supporting industries and how they questionnaire was developed and distributed to all relate to firm strategies and rivalry, can support or 274 Tunisian enterprises active in the field of soft- limit firm activity depending on the firm’s capacity ware production and IT services. The survey to take advantage of the existing conditions. response rate was 18 per cent (or 49 companies). In order to collect additional qualitative data, a sam- To analyse in more detail sector competitiveness ple of software and IT service companies were and the key elements that determine a company’s contacted for on-site meetings and interviews, and success, it is necessary to move from the general 21 Tunisian ICT experts were interviewed. context of the business environment to the level of the firm. One important aspect to consider is (b) Data analysis: on the basis of the data collected, the relative position of firms within the overall the information obtained was analysed from a industrial structure. It has been widely argued that competitiveness point of view. Factors influencing these firm-external structures, which could be the productivity of software and IT service com- determined by shared market strategies, or the panies and the resulting impact on competitive product and service orientation of competitors, advantages and disadvantages were evaluated. have an important influence on firm success (Porter, 1980). (c) Case studies: five software and IT service companies with outstanding characteristics as regards Firm success based on competitive advantages also their strategy development were selected for a depends on the potential of firms to nurture com- more detailed analysis based on personal inter- petitive advantages (Grant, 1991; Wernerfelt, views. The aim of the company case studies is to 1984). Therefore, a competitiveness analysis needs show which strategies have helped the compa- to look at firm-internal positions concerning stra- nies gain competitive advantages and achieve tegic resources, which could be competitive advan- improved performance. In this sense, the cases tages (Barney, 1991; Prahalad and Hamel, 1990). serve as best practice examples for Tunisian suc- For example, if reputation and close business rela- cess stories in the field of software production tionships are crucial to firm success, particular and IT services. The case studies are presented in competencies in these areas can be of strategic annex II. importance.

In March – April 2004, UNCTAD carried out a 2. Sample characteristics survey of Tunisian businesses in the ICT sector, focusing on software and IT services. Its main According to the Chambre Nationale Syndicale objective was to gather information about the des Sociétés de Services et d’Ingénierie Informa- companies’ strategies and performances that could tique (CNS SSII) there are currently 274 software explain their ability to gain sustained competitive and IT service companies in Tunisia. Eighty-four advantages. The following sections present the per cent of the firms employ fewer than 10 peo- research results, which are based on the informa- ple. Within the sample, 53 per cent of the compa- tion obtained from the survey. They provide a nies employ fewer than 10 people. The sample is detailed analysis of Tunisian software and IT serv- therefore slightly biased towards larger firms. ice companies, including their current strategic orientation with respect to internationalization, Twenty-two per cent of the companies surveyed target markets, products and services, and future have an annual turnover lower than 50,000 Tuni- trends and business outlooks, as well as their link sian dinar (US$ 36,430), 27 per cent between with national ICT policies. 50,000 and 200,000 Tunisian dinar (US$ 36,430 and 145,720), and 24 per cent above 200,000 Tuni- 1. Survey methodology sian dinar (US$ 145,720), but under one million Tunisian dinar (US$ 728,600). The remaining 27 The study had three components: per cent have an annual turnover of more than 1 million Tunisian dinar (US$ 728,600), including 6 (a) Field analysis: interviews were held with ICT per cent with a turnover of more than 2 million experts from various Tunisian institutions, such as Tunisian dinar (US$ 1.5 million).

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 7: ASSESSING COMPETITIVENESS IN THE ICT SECTOR. THE CASE OF TUNISIA 193

Chart 7.13 tionalization of business plays an important role Export markets of software and IT for the firms. service companies At the time of the survey, 29 per cent of software and IT service companies in Tunisia did not export at all. They were only active in the domestic market. According to business leaders’ plans, this share will decrease to 6 per cent, as firms are increasingly trying to extend their business in export markets. Seventy-one per cent of the companies in the survey are exporters, including 6 per cent pure exporters exclusively serving foreign markets. Firms that do not sell any products or services domestically are, for example, off-shore outsourcing specialists. In the future, 94 per cent of all software and IT service companies will partly or exclusively serve foreign markets.

Chart 7.13 shows the main target markets. Cus- tomers in Africa and the Arab world are mainly Note: Percentages relate to the export turnover generated by all software and IT service companies. located in North African countries, such as Morocco, Algeria and Egypt. The Gulf States con- 3. Internationalization tribute little (0.18 per cent) to regional export businesses. The highest share of export turnover is The results of the survey reveal that most of the generated in Western Europe. Within the Euro- businesses focus on the domestic market. Twenty- pean market, companies in France contribute the three per cent of the overall turnover generated by major part, followed by Germany. Software and the companies relate to exports, and 77 per cent to IT service companies are not present in the Italian the domestic market. Nevertheless, the interna- market, despite the fact that Italy is the second

Chart 7.14 Structure of turnover of software and IT service companies per region by degree of export orientation (percentages)

Note: Percentages relate to the export and domestic turnover generated by all software and IT service companies.

E-COMMERCE AND DEVELOPMENT REPORT 2004 194 CHAPTER 7: ASSESSING COMPETITIVENESS IN THE ICT SECTOR: THE CASE OF TUNISIA

Table 7.4 Distribution of turnover among software and IT service companies by degree of export orientation

Degree of export orientation >50% 25–50% 10–25% 0–10% 0% (purely domestic)

Overall turnover 11% 14% 47% 13% 15% 100% Domestic turnover 1% 12% 51% 16% 20% 100% Export turnover 40% 22% 35% 3% – 100% Share of companies 11% 9% 20% 29% 31% 100% Relative company size* 1.00 1.56 2.35 0.45 0.48 Concentration domestic turnover** 0.09 1.33 2.55 0.55 0.65 Concentration export turnover*** 3.64 2.44 1.75 0.10 –

* Relative company size measured in share of overall turnover per share of companies. ** Concentration of domestic turnover measured in share of domestic turnover per share of companies. *** Concentration of export turnover measured in share of export turnover per share of companies.

most important trading partner for Tunisia’s Linking turnover to export markets, it can be said economy, after France and before Germany. that middle-size strong exporters take the lead Other Western European markets, such as Swit- regarding turnover generated abroad. They export zerland (1.38 per cent), Belgium (1.01 per cent), mainly to Western Europe, with France and Ger- the United Kingdom (0.33 per cent) and the Neth- many being the most important target markets. erlands (0.12 per cent) play a role for very few On the other hand, there are large hybrid export- software and IT service companies. Exports to ers with exports of 10–25 per cent. Hence, they North America are mainly those to the United greatly depend on the domestic market. Their States, and to some extent also to Canada (0.04 per main foreign target markets are in North Africa, cent). not in Western Europe or North America.

It is interesting to note that the higher the share of In order to capture possible future dynamics in exports in the corporate turnover of a company, the internationalization of software and IT service the stronger the market orientation towards West- companies, business leaders were asked to specify ern Europe. Small exporters sell more in the their target countries and regions for potential regional market, mainly in Morocco, Algeria and new customers (several answers were possible). Egypt. Chart 7.14 shows how different export There is no significant difference in attractiveness markets contribute to the corporate turnover between the regional market, comprising Africa according to the degree of export orientation of and the Arab world, and the Western European the companies. market (table 7.5). One question relates to the future role of North America and the low priority Hybrid exporters with a 10–25 per cent share of given by business leaders to this market. The exports in their business have the major share in responses in the survey indicate that no major the domestic market (table 7.4). The ratio of over- changes should be expected here. all turnover to share of companies belonging to this group indicates that these firms are large As far as country markets are concerned, two enterprises. The high share of 40 per cent of interesting developments might occur. The first is export turnover is generated by companies that do that export activities may be extended to Italy, more than 50 per cent of their business abroad. It although this has not yet been envisaged by any is interesting to see that these firms are of average company despite the fact that Italy is the second size compared with the hybrid exporters and most important export market for Tunisia as a purely domestic firms, as the ratio of overall turn- whole. The second is that the English-speaking over to share of companies shows. market might play a more significant role in the

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 7: ASSESSING COMPETITIVENESS IN THE ICT SECTOR. THE CASE OF TUNISIA 195

Table 7.5 competitors are Tunisian and other North Future markets for software and IT African companies. service companies • In the regional market (North Africa and (percentage of companies) Arab countries), the strongest competition comes from Asia and Eastern Europe. Rank Country / region % • In the Western European market, the main 1 Tunisia 69 competitors are other North African and 2 Arab World and Africa 69 Arab firms. 3 Western Europe/France 67 • In the North American market, competitors 4 Western Europe/Germany 29 from Asia are the most challenging, com- 5 Western Europe/Italy 18 pared with North African and other Arab, 6 North America/USA 16 including Tunisian, firms. 7 Western Europe/United Kingdom 14 8 Western Europe/French-speaking 6 5. Products and markets 9 North America/Canada 2 10 Western Europe/Switzerland 2 Choice of products

From a list of 18 products or solutions, companies future. To what extent, however, is linked first of were asked to select the portfolio they currently all to the obvious lack of attractiveness of the cover and to indicate which solutions they are main English-speaking market, North America, planning to offer in the future. The results show for the majority of firms. that the range will increase significantly over the next few years and companies will have more sim- 4. Competitors ilar product and service portfolios. Today, 47 per cent of the companies offer one specific solution, As earlier research indicated, competitors for web design. In the future, 47–57 per cent of the Tunisian IT exporters mainly originate from East- companies are planning to offer the five most ern Europe and Morocco (ITC, 2004). A closer common solutions. Currently, Tunisian software look at the firm level allows a more precise identi- and IT service companies are specialized in 4.08 fication of the main competitors. For this pur- areas (on average). The greater diversification will pose, target markets/countries were matched with result in 5.78 areas in the product portfolios (chart competitors’ countries of origin. The results show 7.15). that for Tunisian software and IT service companies targeting the domestic market, the most Many firms will extend their product and service important competitors are located in Tunisia. range to include more complex solutions, such as This is not surprising because of the rivalry from enterprise resource planning (ERP) systems. the public ICT sector (see earlier discussion in sec- Other services, such as web hosting, are gradually tion B.4). Also important are companies located in losing their importance in the portfolios of com- Western Europe and, not surprisingly, companies panies. The most common products and services from North Africa and Arab countries entering will be e-commerce and e-business solutions, web the local market. design, customer relationship management (CRM) systems, e-learning solutions and training, and The survey results indicate that there are different ERP systems. competitive advantages on which a company has to capitalize in order to enter and succeed in dif- Chart 7.15 provides a broad image of solutions ferent markets. With regard to competition, the which will play an increasing role for the compa- following emerged from the survey: nies in the future. The relative measures used categorize the solutions that are (more or less) present • Exporters that are also active in Tunisia in current and future product and service portfo- view Asian companies as the most difficult lios, and identify areas of significant market competitors in their export markets. Also dynamics to be expected. The thresholds chosen important (but significantly less important) for both dimensions are based on the mean of

E-COMMERCE AND DEVELOPMENT REPORT 2004 196 CHAPTER 7: ASSESSING COMPETITIVENESS IN THE ICT SECTOR: THE CASE OF TUNISIA

Chart 7.15 Present and future products and services of software and IT service companies (percentages)

% Future share of companies offering a specific solution. + Indicator for leaping from a low present share to a high future share of companies offering a specific solution.

respective minimum and maximum values for all port systems (DSS) and security solutions. Grow- solutions. Both serve an illustration purpose and ing more slowly in importance, but already play- should not be regarded as indicators for evaluating ing a significant role in product and service the strategic meaning of certain solutions for the portfolios of companies, are knowledge manage- companies. ment and telecommunication solutions. The most dynamic future trend is in mobile solutions. These Less dynamic areas are more traditional solutions, products, which currently have a low presence in such as those related to e-commerce and e-busi- the market, have caught the attention of a large ness. The number of companies engaged in these number of firms. In the light of the recent liberali- areas is relatively high, but they do not attract zation of the mobile communications market in many new competitors. On the other hand, there Tunisia, it is not surprising that more and more are areas with quite a large number of competitors companies perceive this as a promising market. offering similar products and services, which still attract a relatively large number of new competi- Business trend: Outsourcing tors, for example CRM solutions. Various forms of outsourcing have developed The main emerging trends regarding the future together with the expansion of ICTs and new portfolio orientation of the companies are supply business models (UNCTAD, 2003b). Following chain management (SCM) systems, decision sup- the global trend, outsourcing also plays a role for

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 7: ASSESSING COMPETITIVENESS IN THE ICT SECTOR. THE CASE OF TUNISIA 197

Table 7.6 Companies with outsourcing business by share in turnover (percentages)

No outsourcing 0–25% turnover 25–50% turnover 50–75% turnover 75–100% turnover Pure outsourcing 20% 53% 16% 4% 2% 4%

Tunisian software and IT service firms. They take not all off-shore outsourcing companies can take over IT functions within their customers’ busi- full advantage of their local proximity to Europe, ness, such as software and database development, their highly skilled engineering work force or lan- customer service, website management, IT train- guage skills, all of which should permit more coming, data reporting, web content management and panies to offer high-value services. There are sev- digital security services. Numerous software pro- eral reasons for this. ducers and IT service companies have entered the market. First, close customer relationships play a key role for successful outsourcing at the top of the value As table 7.6 shows, only a few pure outsourcing hierarchy of services. This requires relationship- specialists are in the Tunisian market. Most firms building skills and intensive communication. An generate up to 25 per cent of their turnover in this essential question in this context is whether the field. A significant number (20 per cent) of compa- existing ICT infrastructure supports cost-effective nies do not conduct any outsourcing business at communication with distant outsourcing custom- all. ers, such as voice-over IP (VoIP) and broadband Internet. Another important issue is the availabil- The survey shows that 86 per cent of export com- ity of management skills, which are crucial to suc- panies are active in the field either off-shore (in cessful relationship management (UNCTAD, export markets) or locally in Tunisia. The major- 2003b) (see section D.7). ity of off-shore outsourcing firms have entered the regional market, whereas North America and Second, at the regional and domestic levels, high- Europe have not yet caught the attention of many value-added services, requiring greater technologi- firms. Among the companies that concentrate cal knowledge and relationship-building, are bet- exclusively on the domestic market, 64 per cent ter represented. Here, Tunisian IT outsourcing offer outsourcing services. firms compete not only on cost (i.e. simpler services), but also on differentiation (i.e. more com- Looking at the added value of services offered, plex services). This is underlined by the fact that, outsourcing companies focusing on the domestic in addition to regional and Asian competitors, market clearly concentrate on complex services business leaders mentioned increased competition with high added value, such as IT consultancy, from Western and Eastern Europe in the field of systems analysis and systems design. Export-ori- outsourcing locally (in Tunisia) and at the regional ented companies offer both complex and more level (in Arab and African countries). European simple services, but low-value-added services, such IT outsourcing firms are forced to compete less on as systems maintenance and customization of soft- costs, and more on differentiated services ware, predominate. (UNCTAD, 2003b).

This underlines again (see section D.3) the differ- Choice of markets and industries ent sources of competitive advantages in different markets. For example, in Western Europe and From a list of 22 industries, companies were asked North America, Tunisian software and IT service to select present and future target industries. firms concentrate on low-value services for out- Results show that, apart from products and serv- sourcing. This indicates that companies compete ices, the average number of target industries will with other regional and Asian competitors on the increase significantly over the next years. Cur- basis of cost rather than high service differentia- rently, 51–53 per cent of the companies target two tion and hence more complex high-value service specific industries (financial services and public offerings. Furthermore, this might indicate that administration). Estimates show that this figure

E-COMMERCE AND DEVELOPMENT REPORT 2004 198 CHAPTER 7: ASSESSING COMPETITIVENESS IN THE ICT SECTOR: THE CASE OF TUNISIA

Chart 7.16 Present and future target industries of software and IT service companies (percentages)

% Future share of companies targeting a specific industry. + Indicator for leaping from a low present share to a high future share of companies targeting a specific industry.

may change to 41–63 per cent, targeting five indus- With regard to the future orientation of software tries of most interest to the companies. The and IT service companies, one of the main emerg- number of target industries will increase from 5.45 ing markets could be the oil and gas industry. to 6.80 per company. More gradually developing, but also important as customer industries, are high tech and electronics, Chart 7.16 provides an overview of types of cus- and logistics. More and more firms are targeting tomers and industries that will increasingly play a the aerospace and defence sector, which might role for software and IT service companies. Small soon play a more important role for software and increases are expected in traditional customer IT service companies. industries, such as financial services and banks. The number of companies engaged in these fields Forty-eight per cent of the turnover of the compa- is relatively high, but these markets do not attract nies surveyed is generated in the public sector. significantly new competitors. On the other hand, The share in the corporate turnover of firms is some industries, already targeted by quite a high declining by the degree of export orientation, number of competitors, will attract a relatively down to 7 per cent of turnover among exporters, high number of new competitors. This is the case with more than 50 per cent of business activities for the telecommunications sector. abroad.

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 7: ASSESSING COMPETITIVENESS IN THE ICT SECTOR. THE CASE OF TUNISIA 199

Technology trend: Free and open source As far as the companies’ experience with FOSS is software concerned, 46 per cent of the companies engaged in FOSS development indicated that they had Much has been said about the significance of free experienced positive impacts on their turnover and open source software (FOSS) for economic and market share as a result of the implementation development. For example, it can help Govern- of FOSS in their solutions. The same number of ments and businesses to minimize their reliance firms did not experience any changes in these two on single suppliers of proprietary software. More- areas. Eight per cent experienced decreasing num- over, FOSS development can play a central role in bers in terms of turnover and market share. upgrading a country’s human resource capacity Regarding revenues, the distribution is slightly dif- and technological skill base (UNCTAD, 2003b). ferent. Thirty-eight per cent were able to increase revenues, 50 per cent did not change, and 13 per FOSS is also an attractive business for Tunisian cent said they faced a decline in revenue due to software companies. Currently, 10 per cent of the FOSS development (chart 7.17). turnover of software companies is generated by FOSS-based solutions, compared with 90 per cent 6. Capital and finance by the use of proprietary software. The minor role in terms of share of turnover should not be misunderstood as very often software solutions Driven by weak capital supply from the banking integrate both FOSS and proprietary software. In sector and an insufficient number of financing Tunisia, 45 per cent of software firms are such models for the IT sector, the presence of private integrators. Fifty-two per cent are concentrating venture capital is not very common among the entirely on the development of solutions based on firms (chart 7.18). proprietary software, and 3 per cent could be identified as FOSS specialists, not using any proprie- As already discussed, public BDS plays an impor- tary software at all. An interesting finding of the tant role for Tunisian software and IT service survey is that there are significantly different companies in order to compensate for the lack of FOSS requirements in export and domestic mar- private funds. The most important public funds kets. While 67 per cent of exporters implement are listed in table 7.7. FAMEX and FOPRODEX FOSS in their solutions, only 29 per cent of com- are BDS programmes tailored for exports. There- panies focused on the domestic market do so. fore, it is not surprising that the share of compa- Domestic customers possibly require fewer FOSS nies using the funds increases with their degree of characteristics in software solutions than those export orientation. Since the objective of the located in the export market. export promotion funds is to increase firms’ activities abroad, their value for companies that already have a strong export focus is rather low. Similarly, Mise-à-Niveau is not particularly designed for Chart 7.17 export or for IT firms, but it is attractive to many Impact of FOSS on business performance of FOSS developing firms (percentages) Chart 7.18 Private venture capital in software and IT service companies (percentages)

Note: Percentage of companies using venture capital or not.

E-COMMERCE AND DEVELOPMENT REPORT 2004 200 CHAPTER 7: ASSESSING COMPETITIVENESS IN THE ICT SECTOR: THE CASE OF TUNISIA

Table 7.7 Most important business development support programmes of companies using BDS (percentages)

Rank Business development All companies 100% Exports Exports Exports Exports support programme domestic 0–10% 10–25% 25–50% >50% 1 FAMEX 41 7 46 56 100 40

2 Mis–à–Niveau 24 14 23 22 50 20 3 FOPRODEX 8 0 15 11 25 0

4 Others 2 0310250 No use of BDS programmes 43 79 23 33 0 60 companies as it helps to implement international financial strength. For instance, the funds require quality standards such as ISO 9001. a minimum commitment from the entrepreneur and external private sources of capital to a joint Exporters with a turnover of 25–50 per cent based project. These requirements can hardly be fulfilled on foreign business are the most advanced users of by small businesses. BDS funds across all programmes. They have the most diversified portfolio of sources of public Chart 7.19 shows how software and IT service com- finance. This might indicate a preference on the panies use BDS. Exporters with the highest share of part of the funds for these companies. In fact, not export turnover set different priorities. They invest only customers and banks are judging software in quality certification and marketing, including and IT service companies on the basis of size and market research, and market positioning analysis.

Chart 7.19 BDS goals of software and IT service companies (percentages)

Note: Goals are measured in percentage of companies having accomplished, not yet accomplished or not having specified this as a goal.

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 7: ASSESSING COMPETITIVENESS IN THE ICT SECTOR. THE CASE OF TUNISIA 201

Chart 7.20 Chart 7.21 Impact of business development Impact of business development support on domestic performance in support on export performance in companies using BDS companies using BDS (percentages) (percentages)

Investments in IT infrastructure are more impor- strategy defines which resources create competitive tant for companies with a low or average export ori- advantages, and how to leverage the advantages entation. Advancing export businesses might most effectively with respect to the company’s require an advanced infrastructure as well. The sur- strengths, weaknesses, threats and opportunities in vey results show that strong exporters might have each market. already developed the necessary IT infrastructure as they do not have this priority any longer. Strategic Successful organizational strategy implementation realignment also plays a role for the hybrid exporter requires consideration of a number of important (with 25–50 per cent of overall export business), and aspects, such as linkages to the operational busi- a clear strategy formulation is a prerequisite for suc- ness, firm-wide awareness of targets, clearly cessful export businesses, as section D.7 will show. defined roles of single business units, organizational incentives to follow the targets, and control To summarize, a significant share of the companies of effectiveness. Chart 7.22 shows the extent to (32 per cent) which collaborated with the funds which Tunisian software and IT service compa- stated that they could increase their revenues and nies have developed and implemented their corpo- market shares in export markets (chart 7.21). Forty- rate strategies (although the time frame is rather three per cent experienced a growth in their export short – less than five years). turnover. As outlined above, export promotion is only one of several BDS targets. Therefore, it is not The results show that there is a link between the surprising that for the majority of companies noth- degree of export orientation and the degree of strat- ing changed regarding their export business. A stra- egy implementation. With an increasing focus on tegic impact of the funds could be that for 33 per exports, companies tend to cover the whole range cent of the firms with an export orientation of 10– of options to support their strategic planning better 25 per cent, the domestic business decreased in within their organization, for example measure- terms of turnover, market share and revenue. This ment of effectiveness and precise action plans. could be due to a strategic realignment of business Therefore, it is valid to say that exporting could towards foreign markets. require companies to implement stronger and more comprehensive strategies in their organiza- 7. Sophistication of firm strategies tions. A reason for that could be the need for a more precise definition of competitive advantages Important to a company’s strategy setting is con- and a strategic choice on how to leverage the advan- sideration of available resources, dynamics in mar- tage in a specific market, or the choice of the most kets and the potential of the company, within the attractive market for the specific advantages that a given business environment. In other words, the company has vis-à-vis its competitors.

E-COMMERCE AND DEVELOPMENT REPORT 2004 202 CHAPTER 7: ASSESSING COMPETITIVENESS IN THE ICT SECTOR: THE CASE OF TUNISIA

Chart 7.22 but also financial strength in their choice of pro- Strategy implementation in software viders. As discussed in section B.3, adequate financing models for large projects, which could and IT service companies help software and IT service companies in this (percentages) regard, are rare in Tunisia.

The question remains to what extent companies will be able to face these challenges. Among the companies surveyed, the most favoured option for resolving problems of financial strength and firm size is inter-firm cooperation. As table 7.8 shows, 80 per cent of all companies consider this to be their strategy for market growth. While cooperation among firms can help in taking advantage of complementary resources and a stronger image for customers, successful collaboration also requires good management skills to coordinate two or more organizations successfully. The alternative organic growth may be hard to achieve given the limited opportunities to participate in large projects. Owing to weak financial and capital markets in Tunisia, mergers and acquisitions (M&A) are the least favoured option. They would require more intensive collaboration with experienced financial institutions to support the process of merging different companies and organizations.

Table 7.9 shows the level of e-business solutions implemented (or planned) by software and IT service companies in Tunisia. It is interesting to Note: The affirmative answers are presented by the number of companies in note that awareness of customer needs and mar- percentages. keting issues seems increasingly to influence the decisions of companies concerning e-business solutions. Traditional IT solutions, such as accounting Chart 7.23 lists the strategic priorities of Tunisian systems, and telecommunication and knowledge software and IT service companies. The top priority management solutions, have an impact on organi- is product marketing, ranging from market research zational efficiency within the firm. and market positioning analysis to marketing campaigns. The awareness of companies about these In the future, CRM systems as well as e-business activities underlines the increasing importance of solutions will gain most in importance. These strategic planning and more dedicated customer ori- tools can help software and IT service companies entation. A clear understanding of customer needs and requirements is a prerequisite for a successful strategy formulation and implementation.

The survey identified possible challenges for firms Table 7.8 to develop and maintain customer relationships Growth strategies of software and over time (chart 7.24). Most critical is the availa- IT service companies bility of resources for the preparation, develop- (percentage of companies) ment and implementation of customer projects. Large customer projects require serious commit- Rank Strategy % ments from both customers and suppliers, regard- 1 Cooperation 80 ing financial means and human resources. As solu- 2 Organic growth 18 tion providers cannot be paid real-time, customers have to consider not only technical capabilities 3 Mergers & acquisitions 12

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 7: ASSESSING COMPETITIVENESS IN THE ICT SECTOR. THE CASE OF TUNISIA 203

Chart 7.23 Strategic priorities for software and IT service companies over the next five years

Note: Number of companies normed to 1; weighted by priority 1, 2, 3.

Chart 7.24 Main challenges for software and IT service companies to develop new customer relationships (percentage of companies)

E-COMMERCE AND DEVELOPMENT REPORT 2004 204 CHAPTER 7: ASSESSING COMPETITIVENESS IN THE ICT SECTOR: THE CASE OF TUNISIA

Table 7.9 E-business trends in software and IT service companies

Rank System / solution Present e-readiness Future e-readiness Change in in % of companies in % of companies ranking

1 Accounting systems 59 65 =

2 Telecommunication solutions 39 41 =

3 Knowledge management solutions 31 33 =

4 Security solutions 31 39 =

5 CRM systems (customer relationship management) 29 51 +

6 E-learning solutions for internal training 16 24 =

7 DSS (decision support systems) 14 24 =

8 E-business and e-commerce solutions for domestic business 8 22 =

9 E-business and e-commerce solutions for exports 4 18 =

Note: Percentage of all companies.

to optimize their downstream business activities not be competitive in the domestic market (and and improve the handling of transactions and vice versa). But companies with no clear strategy processes between firms and customers. or weak implementation are clearly low performers (no matter in which market). To give an example, the more firms focus on the regional market E. Conclusions: Implications for the more they need to develop advantages based on firm-specific resources and their proximate firm strategies and national ICT business environment. Basic factor advantages, policies such as low labour cost, do not apply in the regional market, whereas cultural proximity is important. By contrast, in Western European The aim of the analysis was to look from a com- markets, basic factor advantages apply and techno- petitiveness point of view at Tunisian software logical requirements are higher, whereas cultural and IT service companies in their specific business proximity is less important. The company cases in environment. For that purpose, links were identi- annex II illustrate the diversity and innovative fied between the national ICT strategy and corpo- approaches of different strategies followed by rate strategies of firms in order to evaluate the companies focusing on different target markets. extent to which both approaches complement Successful firms formulate and consistently imple- each other. ment their business strategies. This is a prerequisite for actively developing and sustaining compet- The conclusions therefore address both national itive advantages. and firm strategies and their role in maintaining and enhancing the competitiveness of the sector. The survey revealed that the successful implemen- As far as the enabling business environment is tation of firm strategies plays a crucial role in concerned, and the success of government policies maintaining companies' competitive advantages. in promoting the sector, the survey revealed that These could differ considerably according to the more needs to be done to address the particular target market. For example, a company that is needs of ICT-sector firms. This includes policies highly competitive in the European market may related to enhancing the ICT infrastructure (in

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 7: ASSESSING COMPETITIVENESS IN THE ICT SECTOR. THE CASE OF TUNISIA 205 particular as regards access, pricing and local con- high-quality engineering workforce is an advan- tent), and providing finance, skills and education tage compared with many other countries. (not only in IT related fields, but also in project management and business development). If soft- Firm-level innovation and organizational ware and IT services are a priority for the future implications development of the country, it is important for the Government to consider that other countries Greater emphasis on cooperation and partnerships may do more to promote ICT-sector firms within among Tunisian firms or with foreign companies their national ICT strategy. At the same time, in target markets would support innovation since business leaders have to be aware of the changing joint efforts and complementary skills of partners business environment in the country, and adapt reduce investment risks related to innovation. But their corporate strategies accordingly. Drawing partnerships present a very specific management on the results of the study, the following provides challenge and would require a stronger engage- specific suggestions to business leaders and policy ment in the development of management skills for makers working towards enhancing the competi- the coordination of partnerships, inter-firm pro- tiveness of the sector. cesses and decision-making procedures (Mansour, 2003). Given their (small) size and limited finan- 1. ICT companies: From opportunity to cial resources, companies are aware of the poten- strategy tial of (and need for) stronger inter-firm cooperation, for example in the field of technological The results from the survey and the interviews innovation or external communication in mar- showed that companies will have to prepare to kets. Nevertheless, only a few firms have devel- take an important step, namely the leap from oped inter-firm cooperation to enhance their opportunity to strategy. This is in particular the resource base (Chaabouni and Mezghani, 2001). case for firms planning to expand their export businesses and heading for Western Europe or the Further concentration of business through M&A regional market. Concerning the strategy content, could help Tunisian firms gain the critical size for the following strategic challenges should be participation in large projects. But the feasibility pointed out. of M&A depends on the markets for capital and finance. It remains to be seen to what extent these Products and markets will develop as regards ICT business orientation and overcoming obstacles, such as the lack of tai- The increasingly widespread range of solutions lored finance models and private venture capital and services offered by the firms could present a for software and IT service companies. problem with regard to a clear and competitive positioning in their markets. A stronger specializa- 2. ICT policy priorities tion would help to increase the productivity of companies and may be crucial for gaining compet- Tunisia's e-strategy has created an environment itiveness. that fosters technological progress at the level of the economy and society. The current achieve- Since companies are entering the regional market ments concerning the regulatory framework, or markets in developing countries, competitive infrastructure, business and development support, advantages based on basic factor endowments such and education show some positive results. From as low level of wages do not apply. Businesses the international point of view, Tunisia is taking a should focus more on the value added of products leading position as an ICT player among the and services. Knowledge-based competition is a developing countries. promising field for Tunisian firms as the educational system provides the necessary quality and However, the business environment needs to be quantity of technicians and university graduates in such that it supports effectively the competitive- ICT studies to create high-value-added software ness of firms or a sector. According to the survey and service solutions. Firms focusing on the Euro- results, the Tunisian ICT sector has not yet fully pean or North American market can still take full benefited from national ICT policies, and the advantage of basic factor conditions in Tunisia and effective implementation of the national develop- benefit from low wages. At the same time, the ment plan regarding a supportive business envi-

E-COMMERCE AND DEVELOPMENT REPORT 2004 206 CHAPTER 7: ASSESSING COMPETITIVENESS IN THE ICT SECTOR: THE CASE OF TUNISIA

Chart 7.25 Priorities for the Government for the next five years according to ICT business leaders

Note: Number of companies normed to 1; weighted by priority 1, 2, 3.

ronment for software and IT service companies is munication becomes a key factor as an enabler for questionable. The priorities set by the Govern- services at competitive prices (UNCTAD, 2003b). ment do not entirely correspond to the needs of According to the business leaders, the Govern- companies. The views of the business leaders cap- ment should give this matter the highest priority tured in the study point to the most critical areas in the national e-strategy (chart 7.25). for government action (chart 7.25). As a result, a realignment of the national e-strategy is necessary Business development support with regard to those elements that limit the companies' strategic options and competitiveness. The Stronger promotion of Tunisia as an IT brand in for- following suggests several ICT policies that could eign markets. Branding is crucial, and currently the play a key role in this context and makes recom- image of Tunisia in foreign markets is determined mendations for future steps that might be taken. more by tourism than by technology. The Gov- ernment will have to focus more on the promotion Infrastructure of “IT Made in Tunisia” in order to support the country's software and IT service exports (ITC, Cost-efficient advanced communication technologies. 2004). This could be done, for example, through a The improvement of the telecommunications stronger presence at international trade fairs. Busi- infrastructure is crucial to the companies' need for ness leaders consider this to be the second highest communicating with target export markets priority for the Government’s e-strategy. (UNDP and CEPEX, 2004). The results presented in chart 7.26 show that technologies such as Reinforcement of export promotion funds for ICTs. broadband, satellite connections and VoIP play an A further adaptation of BDS to the particular important role for businesses and require needs of ICT firms is necessary. The recent initia- improved access. This applies particularly to out- tives by the Government are the first signs of sourcing, which requires close continuous cus- stronger support for ICT firms. The one-sided tomer relationships and hence relies heavily on promotion of entrepreneurship and innovation communication. In this context, low-cost telecom- primarily increases the domestic dynamics within

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 7: ASSESSING COMPETITIVENESS IN THE ICT SECTOR. THE CASE OF TUNISIA 207

Chart 7.26 Availability of communication technologies (percentage of companies)

the ICT sector. To enhance growth potentials in l'Informatique (UNDP and CEPEX, 2004). This export markets, the Government has to consider would also respond to the call of private busi- whether the existing BDS structures are adequate nesses for large national investment projects. The to support effectively firms' export strategies. reallocated financial resources would help firms to Access to export markets is still a challenge for acquire the size, financial strength and experience many companies. Therefore, existing BDS pro- necessary for becoming successful exporters. A grammes should be reviewed and optimized to gradual reduction of public ICT production allow ICT firms to participate effectively in funds should be in areas that support most effectively such as FOPRODEX and FAMEX. The survey the competitiveness of private software and IT ser- results clearly indicate that this subject should vice companies, for example through greater par- have the third highest priority within the national ticipation in projects with the public sector and e-strategy. the public administration (ITC, 2004). Success- fully stepping into export markets also requires a Strategy consulting for SMEs. Apart from financial certain experience with customer projects in the BDS, small firms suffer from a limited capacity to public sector. Therefore, such projects should be develop business strategies necessary for succeed- assigned to private businesses. ing in (export) markets. Therefore, the current BDS system should be complemented by offering Awareness creation for software and IT services. The consulting services to SMEs in the area of strategy Government could help the software and IT serv- development and transfer of management know- ices companies in the domestic market by raising how.7 awareness about the potential of ICTs to improve productivity and hence competitiveness, and thus Reduction of public ICT development. The Govern- encourage other sectors to increase their adoption ment established a number of institutions to boost of ICT. This would also support the process of ICT development in Tunisia and to support privatization and deregulation in the light of the research and development at a time when no pri- ongoing opening of the economy to the global vate companies were in a position to do so. Given market (World Bank, 2002). the developing information economy in Tunisia, the role of the public sector in this field has to be Gaining international experience. Ways should be reconsidered. One approach could be the gradual found to effectively promote partnerships among reduction of the role of the Centre National de private businesses at the international level, given

E-COMMERCE AND DEVELOPMENT REPORT 2004 208 CHAPTER 7: ASSESSING COMPETITIVENESS IN THE ICT SECTOR: THE CASE OF TUNISIA that this is an important challenge for Tunisian IT This could be done by projects in future growth exporters. One way could be to attract FDI, areas of software and IT services. Relevant areas which would allow Tunisian firms to join interna- for public engagement could be e-government, e- tional networks by collaborating locally with for- learning and digital security. eign firms and thus integrate into customer value chains abroad. Moreover, the public sector could Education help local IT firms gain experience in international projects by also considering international Cross-functional skills. The survey results empha- companies in tenders for large ICT investment size that the success of ICT companies does not projects. Local firms would thus get the chance to depend solely on a highly skilled engineering collaborate with international partners (ITC, workforce. With the increasing complexity of 2004). Action in this regard has been initiated at high-value-added IT services it becomes more and the national and regional level, in order to increase more important for companies to be able to resort the participation of foreign enterprises in the to excellent management knowledge. A greater domestic market.8 promotion of studies that serve as a cross-functional interface between technology and business might be a solution. Facilitating partnerships. Public export promotion institutions should increasingly engage in the Learning target markets and languages. As the num- establishment of partnerships between Tunisian bers for international student exchanges show, IT firms and foreign companies. This might be Tunisian graduates who have studied abroad have achieved through offices located abroad, which a strong orientation towards French-speaking could enhance presence in the target markets. countries. Not only language skills but also valua- Another measure would be the creation of data- ble knowledge about key ICT target markets bases shared by Chambers of Commerce and com- could be generated if Tunisian students gained panies looking for partners abroad, and vice versa international experience in other countries. In (UNDP and CEPEX, 2004). that way, the market potential of software and service solutions could be leveraged more effi- Open source promotion. The potential of open ciently since access to new markets abroad would source for IT companies to gain competitiveness be facilitated by internationally experienced grad- as identified in section D.4 calls for a greater pro- uates, for instance in Italy, Germany or the motion of FOSS to support private businesses. United Kingdom (ITC, 2004).

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 7: ASSESSING COMPETITIVENESS IN THE ICT SECTOR. THE CASE OF TUNISIA 209

ANNEX I

Competitiveness“àlaune”

Competitiveness is a widely discussed, but nonetheless often misunderstood term. According to Porter (2003), it is measured by the productivity of firms, or more precisely, by their capacity to increase productivity.

An essential question is how to explain why certain firms perform better than others. Management theory has made various attempts to identify and examine the origins of competitive advantages that cause performance differences, and the strategies that lead to them (Barney, 1991; Porter, 1991; Jacobson, 1992).

Porter (2003) states that the ability of firms to develop and enhance competitive advantages depends primarily on two interrelated aspects – the quality of the national or immediate business environment, and the sophistication with which firms compete in the domestic and international markets. The origin of competitive advantage is thus to be found not only within the firm, but also in the proximate business environment. The latter is crucial for providing essential input factors, skills and knowledge that firms can draw on, influencing goals that determine investments, and putting pressure on firms to innovate and accumulate resources.

According to this approach, four attributes, collectively termed the "diamond", determine the business environment in a country and its impact on firms with regard to developing and enhancing competitive advantages. These are factor conditions, demand conditions, the presence of related and supporting industries, and the context of firm strategies and rivalry.

Industrial organization (IO) economics aims to explain competition among firms in industrial structures from an external view of the firm. The traditional structure-conduct-performance or Bain/Mason paradigm of IO offers a systematic model for assessing competition within an industry. According to this approach, the success of a firm and of an industry is the result of a certain industry structure, which deter- mines the behaviour and strategic choice of firms, and their profitability (Porter, 1981).

Porter also notes that the structural evolution of industries can be significantly influenced by rivalry among competitors, uncertainty of events and the strategic choices that firms make. In this sense, industry structure and business strategy are complementary and connected by feedback loops, rather than a strategy being an automatic consequence of the particular structural context.

In order to better reflect this interdependence, Porter (1991) extended the structure-conduct-performance paradigm and developed what he called the "industry structure analysis". This framework aims to explain sustainable performance differences on the basis of a firm’s relative position within an industrial structure, which is influenced five forces: the threat of new entrants into an industry, the bargaining power of buyers and suppliers, the threat of substitute products or services, and the rivalry among existing competitors (Bresser, 1998).

E-COMMERCE AND DEVELOPMENT REPORT 2004 210 CHAPTER 7: ASSESSING COMPETITIVENESS IN THE ICT SECTOR: THE CASE OF TUNISIA

ANNEX II Companycasestudies

The following case studies illustrate in more detail how Tunisian ICT firms have positioned themselves within their business environment. The cases shed light on the operations of the companies and their corporate strategies and show that there are numerous possibilities for strategic planning within the same business environment. Technological expertise is important for all of them, but in terms of financing, markets envisaged, and partnership models they all differ.

Telnet Telecom Networks Engineering Immeuble Ennour, Centre Urbain Nord, 1082 Tunis Mahrajène Contact Internet: www.telnet.com.tn Phone:+216 71 706 922 E-mail: [email protected] Fax: +216 71 706 939

Year of establishment: 1994 Employees: 100 Quality certification: ISO 9001

The company targets the telecommunication sector, the automotive industry and the information technology industry. The business has a clear focus on the Specialization private sector, which accounts for 90 per cent of its turnover. The range of products and services concentrates on information systems and software development, electronic systems design and client-server systems. Twenty-six per cent of the turnover is generated by offshore outsourcing contracts with Western Euro- pean enterprises. Eighty-five per cent of the business is based on exports to Western Europe, mainly France. In 2002, Telnet opened a sales and consulting office in Paris in order to be more present and visible to their existing and potential customers. The company is Strategy aiming at an extension of exports to other Western European countries. Extensive market research was therefore carried out before the export strategy was adopted. The audit aligned the strategy to the requirements identified for the future target markets. Crucial to the strategic realignment was the financial support of public BDS funds. Telnet capitalizes on a decade of experience with Western European customers. The proximity to Europe has always been an important factor for its success. Competition Therefore, this advantage was chosen as a strategy and is implemented via sales offices in target markets. Technological competencies and low costs are the key advantages envisaged by Telnet.

WebOne E-Business Solutions 21 Rue Abd El Hamid Ibn Badis, 1002 Tunis Contact Internet: www.webone.com.tn Phone:+ 216 71 784 726 E-mail: [email protected] Fax: + 216 71 894 326 Year of establishment: 1999 Employees: 21 Quality certification: none

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 7: ASSESSING COMPETITIVENESS IN THE ICT SECTOR. THE CASE OF TUNISIA 211

The company targets the automotive and electronics industry, the financial services and professional services sector, and the media industry. WebOne has customers only in the private sector. The range of products and services concentrates on J2EE-based e-commerce, m-commerce and e-business solutions, CRM, ERP and content management systems. WebOne is an offshore outsourcing specialist Specialization whose entire turnover is generated by software development for the German partner company Think Tank Corporate Consulting. The partner specializes exclusively in consulting and customer relationship management in the German and Swiss markets. Software development and implementation are carried out solely by WebOne. The whole of the business is based on exports to Germany and other German- speaking countries in Western Europe. In 2001, WebOne decided to acquire Think Tank, which was sold by the former owner, an international consulting group. It kept the existing customer relationships and is acquiring new customers in the German-speaking part of Europe. The company is aiming at an extension of Strategy the partnership model to other Western European markets, and at software development and offshore outsourcing in connection with an experienced partner (or a subsidiary) in a target market with expertise in IT consulting and acquisition of customers. Public BDS is used by the company to explore foreign markets for potential partners. WebOne can capitalize on a clear focus on the target market with a permanent presence and visibility for customers through its subsidiary Think Tank. The specialization in customer relationship management and software development for Competition highly competitive prices combines three advantages: costs, local proximity and cultural proximity. WebOne is thus facing up to the strong competition in the market, which also challenges the capabilities of firms to continuously develop the basis of success, namely technological leadership.

HexaByte Group Connecting the dots ... 11 Rue du Niger, 1002 Tunis Internet: www.hexabyte.tn Phone:+ 216 71 288 682 Contact E-mail: [email protected] Fax: + 216 71 287 754

Year of establishment: 2001 Employees: 22 Quality certification: none

The HexaByte Group consists of four cross-linked companies which cover different businesses. The group addresses the telecommunication and software industry, and the information technology sector. Fifteen per cent of turnover is generated in the public sector, and 85 per cent in the private sector. The group offers solutions in the field of telecommunication, Internet services, digital security, e-commerce, Specialization m-commerce, e-business and web marketing. Offshore outsourcing contributes five per cent to the overall turnover. The core business is the private Internet service provider HexaByte. Promotions.com.tn is the web marketing specialist in the group, e-Serve offers mobile solutions for GSM networks and Punica.com is about to be launched as the first Tunisian tourism web portal. The core competencies are clearly separated and highly specialized for each of the four firms.

E-COMMERCE AND DEVELOPMENT REPORT 2004 212 CHAPTER 7: ASSESSING COMPETITIVENESS IN THE ICT SECTOR: THE CASE OF TUNISIA

HexaByte’s businesses concentrate on the Tunisian market (95 per cent of turnover). The remaining five per cent derives from activities in Western Europe, mainly in the United Kingdom and France. With its subsidiaries, the group pursues consistent niche market exploration and development. Businesses are Strategy developed around opportunities arising out of existing business activities. The group is aiming at the extension of its activities by leveraging spin-off opportunities for highly specialized independent businesses. In this connection, it sees itself as a business incubator (”We take the market where nobody has been before…”). HexaByte competes in each of its businesses separately in different markets. The common target is to be the first mover in each field of business. Therefore, the Competition company brand plays a key role in success. Each subsidiary of the HexaByte Group can capitalize on reputation and brand values.

Oxia Your partner of choice 11 Rue Claude Bernard, 1002 Tunis Belvédère Internet: www.oxiasoft.com Phone:+216 71 288 682 Contact E-mail: [email protected] Fax: +216 71 287 754

Year of establishment: 2000 Employees: 59 Quality certification: ISO 9001

The company targets the chemical and pharmaceutical industry, the financial services sector, consumer goods, the engineering and construction sector, and the Specialization software industry. Eleven per cent of turnover is generated in the public sector, and 89 per cent in the private sector. The group specializes in ERP, CRM, SCM systems, and telecommunication solutions. Offshore outsourcing contributes 16 per cent to the overall turnover. The target markets are Tunisia with 50 per cent of turnover, 34 per cent for Western Europe (mainly France) and 16 per cent for North Africa. Oxia emphasizes human resource development. In 2002, the company bought out a complete team of developers and consultants in Tunisia from a former project with a Euro- pean customer. Oxia thus kept the experience and know-how of the successful collaboration for future projects. An additional office for software development Strategy was established in Algeria, which was supposed to further complete the human resources of Oxia. The extension of businesses is aiming at more exports to the regional market, Africa and Middle East, and Western Europe. Public BDS plays an important role in the process of exploring and learning about new target markets, and in evaluating business opportunities. Private venture capital was the enabling factor for Oxia’s M&A activities and helped in the establishment of the subsidiary abroad with know-how in finance and organizational issues. Oxia is taking advantage of the combination of highly specialized human resources regarding technological knowledge and experience in different target markets. It explores and chooses markets, which makes it possible to leverage the maximum Competition potential of the organizational capabilities of the company, such as combined complementary skills. The experience in the utilization of private venture capital is a key factor in Oxia’s success, as M&A have always been the necessary tool for the integration of organizational complements.

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 7: ASSESSING COMPETITIVENESS IN THE ICT SECTOR. THE CASE OF TUNISIA 213

References

Ambassade de France en Tunisie (2003). Développer la coopération France – Tunisie dans le secteur des TIC. ATI (2004). www.ati.tn

Barney JB (1991). Firm resources and sustained competitive advantage. Journal of Management 17.1: 99–120.

Bresser RKF (1998). Branchenstruktur- und strategische Gruppenanalyse. Strategisches Management 183–188. Walter Gruyter, Berlin and New York. Chaabouni PJ and Mezghani L (2001). Environnement et Stratégies des Sociétes de Service et d'Ingénierie Informati- que en Tunisie. Les Cahiers de l’ERGE 8: 38–52.

CNS SSII (2004). www.ssii.org.tn

Foreign Investment Promotion Agency (FIPA) (2002). Services informatiques: Call centres, développement de logi- ciels. Étude Comparative de Compétitivité par Produit: 36–41, Tunis. Grant RM (1991). The resource-based theory of competitive advantage: Implications for strategy formulations. Cali- fornia Management Review: 119–335.

ITC (2004). Évaluation des exportations de services tunisiens et de leur évolution de 1998 à 2003: 13–19.

ITU (2002). Tunisia and the new information and communication technologies towards the digital culture. Geneva. ITU (2003). World Telecommunication Development Report 2003: Access Indicators for the Information Society. Geneva.

ITU (2004). Telecommunication Indicators Handbook. Geneva.

Jacobson R (1992). The "Austrian" school of strategy. Academy of Management Review 17(4): 782–807. Mansour A. (2003). Compétitivité de la Tunisie dans l’attraction d’IDE dans le secteur des NTIC. Presentation by A. Mansour, General Director of the Foreign Investment Promotion Agency (FIPA), at the Technology Park Elgazala, June 2003. Ariana, Tunisia.

Ministère de l'Enseignement Supérieur, de la Recherche Scientifique et de la Technologie (2003). 40 indicateurs de l'enseignement supérieur, de la recherche scientifique et de la technologie.

Ministère des Technologies, de la Communication et du Transport (2003). Les technologies de l'information en Tunisie : Un secteur à forte valeur ajoutée. OECD (2002). Measuring the Information Economy. Paris.

Porter ME (1980). Techniques for Analyzing Industries and Competitors. New York, Free Press.

Porter ME (1981). The contributions of industrial organization to strategic management. Academy of Management Review 6(4): 609–620. Porter ME (1990). The Competitive Advantage of Nations. New York, Free Press.

Porter ME (1991). Toward a dynamic theory of strategy. Strategic Management Journal 12: 95–117.

Porter ME (1998). On Competition. Harvard Business School Press. Porter ME (2003). Building the microeconomic foundations of prosperity: Findings from the microeconomic competitiveness index. The Global Competitiveness Report 2002–2003: 23–46. New York, Oxford University Press.

Prahalad CK and Hamel G (1990). The core competence of the corporation. Harvard Business Review 71–91.

Raffa M, Esposito G, Landoli L and Bruno G. (2002). Hi-tech small firms in developing countries: An exploratory analysis. Umbruch der Welt – KMU vor Höhenflug oder Absturz? Radical change in the world – will SMEs soar or crash? St-Gall: 333–345.

République Tunisienne (2001a). Le Dixième Plan de Développement 2002–2006: 85–90.

E-COMMERCE AND DEVELOPMENT REPORT 2004 214 CHAPTER 7: ASSESSING COMPETITIVENESS IN THE ICT SECTOR: THE CASE OF TUNISIA

République Tunisienne (2001b). The Tenth Plan in Brief 2002–2006.

UNCTAD (2003a). Handbook of Statistics 2003. United Nations publication.

UNCTAD (2003b). E-Commerce and Development Report 2003. United Nations publication. UNDP (2001). Human Development Report 2001. New York, Oxford University Press.

UNDP & CEPEX (2004). Services informatique et services connexes. Offre tunisienne de services à l'exportation. Tunis: 19–27.

UNIDO (2004). Tunisie: A propos d'IBIS. www.unido.org/en/doc/4677 Wernerfelt B (1984). A resource-based view of the firm. Strategic Management Journal 5.2: 171–180.

World Bank (2002). Nouvelles technologies de l'information et de la communication en Tunisie: Création d'emploi et croissance économique. Washington, DC.

World Economic Forum (2003a). The Global Competitiveness Report 2002–2003. Geneva. World Economic Forum (2003b). The Global Information Technology Report 2002–2003. Geneva. www.elgazalacom.nat.tn

E-COMMERCE AND DEVELOPMENT REPORT 2004 CHAPTER 7: ASSESSING COMPETITIVENESS IN THE ICT SECTOR. THE CASE OF TUNISIA 215

Notes

11. The second phase of the WSIS will take place in Tunis from 16 to 18 November 2005. The first phase took place in Geneva from 10 to 12 December 2003.

12. It defines the ICT sector as a combination of manufacturing and services industries that capture, transmit and display data and information electronically. For manufacturing industries, the products of a candidate industry must be intended to fulfil the function of information processing and communication, including transmission and display, and must use electronic processing to detect, measure and/or record physical phenomena or control a physical process. For services industries, the products of a candidate industry must be intended to enable the function of information processing and communication by electronic means (OECD, 2003).

13. Excluding the telecommunication sector.

14. A comprehensive discussion of national ICT strategies, in particular policies to foster the adoption of ICT by the business sector in developing countries, is provided in UNCTAD (2003b). 15. Tunisian households benefit from bank loans at reduced interest rates and reduced prices to purchase computers. A total of 22,600 personal computers were sold with the help of the Ordinateur Familial programme up until 2001. Three per cent of households were equipped with personal computers in 2001. Estimates for the dissemination of personal computers among households in 2006 rise to 10.5 per cent.

16. The participation in the Mise-à-Niveau programme requires firms to provide a comprehensive analysis of their whole business and strategy. The strategy has to be approved by the advisory committee of the programme. After approval, 10–20 per cent of material investments, such as hardware, and 70 per cent of immaterial investments, such as software and IT consulting, are covered by the funding of the programme.

17. Empretec is UNCTAD’s integrated capacity-building programme; it helps to foster entrepreneurial capabilities and the growth of internationally competitive SMEs. The programme identifies promising entrepreneurs, provides them with training aimed at strengthening their entrepreneurial behaviour and business skills, assists them in accessing business services and financing for their business ventures, helps to establish cooperation with domestic and foreign companies, and puts in place long-term support systems to facilitate growth and internationalization. For further information see www.empretec.net.

18. www.tunisurf.com, www.appeldoffres.mincom.tn, www.tunisieappelsdoffres.com

E-COMMERCE AND DEVELOPMENT REPORT 2004 Printed at United Nations, Geneva United Nations publication GE.04-52782–December 2004–3,820 Sales No. E.04.II.D.42 UNCTAD/SDTE/ECB/2004/1 ISBN 92-1-112653-3